Here's how these "templates" work. (Keep in mind that I have not installed the Site Template plugin from MHC, but instead the Site Creation Wizard plugin http://wordpress.org/extend/plugins/site-creation-wizard/)
Both "Templates" and "Features" are, essentially, blogs whose settings are going to be copied over. In the case of Templates, everything - theme, theme options, settings, content - is copied over to the new blog. That's why you can only select one of them. In the case of Features, the plugin will copy over all non-theme-related settings from the Feature blog(s) in question that are not already set on the new blog.
I guess the idea is that you might have a "Research Blog" template (say) and Features like "Rich Media" or "Math and Science features" (LaTeX etc).
I think that this has the potential to be quite confusing. Here's a suggestion: we start off with Templates only. Once we have whittled down our Templates list to something workable, we can think about adding separate feature sets.
As for process: We can't activate the plugin on the production site until there are template blogs in place. So, I suggest creating a number of blogs (they can have the highest privacy level - visible only to admins) and setting them up as templates, before this plugin is activated.