The cloth basically acts the same as a wire mesh does in a concrete pour - it provides strength across a larger area. Spread a little epoxy over a piece of plastic. After it's cured, flex the plastic and you can crack the epoxy sheet into splinters. But if you have a layer of cloth embedded in it the whole piece will lift off the plastic, staying intact. When applying it to wood the epoxy soaks into the wood fibers and bonds to the wood so there is little chance of the whole piece lifting off the wood. However there is still the chance of tiny cracks. On a wooden torsion box such as the teardrop bodies how much flex there is probably depends on the design and construction. 1/8 ply will flex more then 3/4 ply. I'm no expert though and it would seem in these cases to be a personal choice thing.
Heikki - osmotic blistering is when water penetrates the surface of the epoxy (normally a gelcoat finish) on a boat hull and begins to delaminate the finish from the substructure causing a blister in the epoxy and fiberglass layers. I have never seen blisters above the waterline. In other words, the teardrop would have to be immersed in water quite a while for osmosis to occur.
As far as smell - brands differ. Most that I've used have a fairly strong odor comparable to Acetone, Toluene, or Xylene. The odor dissipates quickly when curing though. We recently used Epiglass epoxy which has a strong ammonia smell to it. Personally I'd rather smell Acetone all day. Steve has recommended this before and I do to - get a respirator if you're working in a confined area. I'm not so concerned about killing brain cells or ruining my lungs. It's the damned headaches I can't stand.
Dave