Garret,
Your drawing is correct.
1. ifconfig eth0:1 192.168.1.1 netmask 255.255.255.0
ifconfig eth0:2 192.168.2.1 netmask 255.255.255.0 etc.
2. I didn't get your question. This setup creates number of independent networks and prevents users from directly communicate with each other. VLANs are used to prevent them from changing their networks. Example: if users changes his/her IP from 192.168.40.5 (connected to VLAN “192_168_40”) to IP in the “Neighbor’s network” 192.168.42.5 it will not work as this VLAN “192_168_40” connects to eth0:40 with IP 192.168.40.1 on the router (SME). Further, you use ipchanes rules on the SME server to block traffic between the networks 192.168.1.0, 192.168.2.0, … 192.168.40.0 192.168.42.0 etc.
3. Yes and limit is much higher then you need. Even "small" C2950 supports 64 VLANs per switch. Something like C3550 will give you more then a 1000 VLANs.
4. See above. I am not sure now many IP aliases supported by Linux (32?, 127?, 255?).
you can add, third, forth real NIC in your SME server as well. Search phorum for how-to add third NIC.
Sorry, I am not good in writing how-tos, but hopefully you will get the basic idea.
Boris.