questions on WPMU – blogs.dir and subdirectories

Hello – I have a few questions on WPMU.

1. is the blogs.dir directory that is supposed to be created under wp-content a folder?

2. I am using a subdirectory. The wordpress files are currently under mysite.com/wordpress. With MU enabled, is it possible to keep the wordpress files stored there and change the address to mysite.com?

3. I created a new blog subdirectory as mysite.com/wordpress/test and it says the link is broken. Any suggestions?

Thanks! Sorry these are probably silly questions, I’m new to this!