General rules for multiple Drupal deployments
Each of the possible multi-drupal scenarios is discussed in more detail in the sections that follow, but the general form for the alternate configuration filename is:
./sites/<i>vhost.uri</i>/settings.php
Note how the path separator ('/') must be changed to a dot. As an example, the vhost drupal.mysite.net may have one primary drupal server at the DOCUMENT_ROOT location, but a second site may begin at DOCUMENT_ROOT/altserver. For this case, the configuration file would be ./sites/drupal.mysite.net.altserver/settings.php
Within that configuration file, the most common and minimal option is to set the $db_url that specifies the host, database and login for the Drupal tables, as well as the $base_url. But you can also include assignments to override anything in the VARIABLES table. This allows you to redefine the theme, the site footer and contact email, blocks per-page limits, even the name you use for anonymous.
Drupal IDs: When using multiple drupal servers on the same hardware, each new configuration will result in a new host component for the username@<i>host</i> Drupal login ID (used when logging into a foreign Drupal server). For example, if you have a directory partitioned host at drupal.mysite.net/altserver your usename to login to some other Drupal server would be USENAME@drupal.mysite.net/altserver.
Prefixing Database Tables to put them in One Database If you only have one database then it is necessary to use database table prefixing. See this handbook page for details on how to achieve that.

seperate sites as sub directories
it seems that it is possible to use the 'sites' configuration method for running seperate sites with sub directory urls and seperate database, but it requires the extra step of creating a symbolic link back to the drupal base directory for each sub site, eg;
www.example.com/subsite
would require:
drupal/sites/www.example.com.subsite/settings.php
plus
/var/www/drupal$ ls -lsubsite -> /var/www/drupal
It would be good if this could be made more clear in the explaination above
And for IIS users...
Symlinks are not an option. But you can still have multiple sites with subdirectory URLs. Create virtual directories (/subsite1, /subsite2, etc.), and point them back to the parent directory (where Drupal is installed), having followed the other instructions for multi-site installation that can be found in Install.txt. (http://api.drupal.org/api/file/INSTALL.txt/5/source)