Mathman, you are right about the penalty for not performing in the exhibitions. There is also a rule that says skaters are supposed to use an actual "exhibition" program, meaning they shouldn't be using their SP or LP. There is also a rule that the gold medalists are supposed to do some sort of encore. I read it in one of the various official documents that the ISU sends out. It was probably on their homepage.
I've always seen top five do the exhibitions, and sometimes the top finishers from the host country perform as well, ie I believe Belbin and Agosto performed at Worlds 2003, even though they finished 7th.