Answers to your questions:
1) Yes, it works, but probably will not bring the best out of it, but should be much better than using Apache.
2) LSWS comes with php4 binary, If you want to use PHP5 or any other modules not in the prebuilt binary, you need to compile your own php binary, if you need run both php 4 and 5, need to create antoher php external app, adding script handler etc.
3) You can test out LSWS on another port, it is not a good idea to switch from apache to LSWS without testing.
4) Yeah, just run the installer and select upgrade.