S-OFF unlocks the bootloader, you can install basically anything on any partition on the phone. This lets us install a custom recovery in the recovery partition. It also allows to boot custom kernels without flashing them (I believe)
Rooting with S-ON just allows you to boot a custom ROM with root access and no read/write capabilities in the /system partition (unless you have aufs)
probably wrong, but i don't think i am using fake flash...With s-off you can edit files in the /system partition without the need of switching to recovery, but i don't think that it is a functionality needed by many people.
If you have s-off you can also flash a recovery, therefore you won't need anymore to use fake-flash for booting in clockworkmod.