Deanna, I tried using it on a subdomain install, and I get a "Not Found" error.
I tried all four of the restrictions, and got the same result. Also, I created them with the title "Test Blog" and it displays as "My Blog" for some reason (I'd guess somehow the title isn't getting put into the database, so WPMU uses the default).
Here are the url's:
No dashes are allowed.
http://a-b-c.blogjockey.net/
No underscores are allowed.
http://a_b_c.blogjockey.net/
The name can not be all numeric.
http://12345.blogjockey.net/
Name must be at least 4 characters long
http://abc.blogjockey.net/
This is a site that is pretty much defunct, so you're welcome to use it as a test site if you need to.
Edit: I didn't notice until after I posted that it doesn't apply to blogs created via site admin. Would that cause it?
Edit 2: I went to create a blog via the "blog not found" method (i.e., trying to go to a blog that doesn't exist) and just get a blank page. See http://blogjockey.net/wp-signup.php?new=1234567