**There seem to be some issues with this plugin and WordPress MU 2.8 so please ONLY USE IT WITH 2.7. I doubt I will be updating this plugin anytime so
No it only works with VHOST (subdomain) installs. A version for subdirectories is in the works.
Not with this version (0.1). A version with support for multiple subdomains is in the works.
No, the script just assigns a subdomain to the user but the user can sign up for a blog if he/she wants to.
Yes, one database table will be created for storing the subdomain settings. The profile page settings will be stored with the user meta. The plugin also modifies the blog path in the blogs table if necessary. All other core WordPress MU tables are not touched.