I'm no expert on volleyball, but here is how the libero is typically used:
1. They are usually the team's best back-row player
2. They sub in for two players on the opposite sides of the 6-player rotation. They play through three rotations (playing all three back row rotation spots), come out briefly, then come back in for the other player they are replacing (who is now just entering the back row)
3. They can only serve for one of the two players they replace. The other player they replace must serve for herself (while the libero is out of the game), and the libero comes in for her after that player is done serving.
4. Back row players can never attack, block, or set in front of the back row line. Since the libero is always a back row player, they are always under this restriction.
mred is mostly right. Most liberos play for the middles in the back row, some teams use them for the outsides - always depending on which players are more effective in the back row. But they can actually play all six back row positions if the coach so desires - but it is exceedingly rare for them to play more than two or three positions.
They can only serve in one position in the rotation.
When they replace a player - that same player must replace them when they rotate to the front row. When they are replaced, they must be off the floor for at least one "completed" rally. The exception to this is when they are going to serve - then the libero rotates into the service position and is not required to leave for a rally. When this happens, you will see the two middles/outsides switch with each other. This is essentially two libero replacements.
The other big advantage for a coach is that, besides hopefully having a more effective back row player, libero replacements do not count against the 15 (up from 12 last year) substitution limit. "Replacements" are required to happen over the sideline between the three meter line and the end line - and are NOT administered by the 2nd referee. Substitutions are administered in FRONT of the three meter line by the 2nd referee.
Host management is required to provide an assistant scorekeeper (libero tracker), who sits next to the official scorekeeper, and her main job is to ensure that all libero replacements are "proper" (legal). If an improper libero replacement occurs - the assistant scorekeeper immediately notifies the 2nd referee.
Not quite correct about back row players not being able to set in the front zone. When we run a 5-1 offense, the setter is back row for 3/6 rotations and there is no restriction on her ability to set in the front zone.
The limitation is that - if the libero finds herself in the front zone playing a second team contact, she can "bump" set, and anyone can attack the ball as they normally would. However, if she sets the ball overhand - with finger action, and anyone attacks the ball above the level of the net, it is a fault and signaled as a back row attack. Teams will usually communicate in this circumstance and let the attacking player know that she needs to let the ball drop below the net before attacking, often as a "push" or roll shot.
One other limitation is that all non-libero players can attack the ball above the level of the net - even back row players if they take off behind the three meter line. Liberos can NEVER attack the ball above the level of the net -even behind the three meter line.
Cyclone fans may also be interested to know that ISU is using electronic score keeping software this year, as opposed to a paper score sheet.