You would probably get better responses if this were under the Disney Restaurants board.
We used the dining plan and it was WONDERUL. Of course when we went, it wasn't free, but still very much worth it.
I'm not sure exactly what you are looking for when you are asking how it works, so I'll just give a general overview.
For each person in the group you get 1 table service, 1 counter service, and 1 snack credit for each night you are staying at the disney resort. Those credits are all pooled together and attached to your room reservation. So, if you have 4 people for 5 nights, you'll have 20 TS, 20 CS, 20 snack credits lumped together. You use these credits by presenting your hotel room key card. So if all 4 of you go to dinner, you just tell the server you are on the dining plan and when you get the check, you just hand them 1 of your room cards.
If you have specific questions, please ask away.
As for where you can use it, there's quite a list of places. And yes, you can use them for character dining experiences (those cost 1 TS credit each). If you go to
www.disneyworld.com you can access the brochure. Or
Click Here for a Link to the Brochure
HTH