I haven't played Battlespire, but I've read about it for the lore. So I'll do my best to answer your questions...
1. Is it true it's more linear than other ES Games?
It has a mission linearity. You complete one level, then go onto the next. There are no shops to buy or sell, so you have to drop anything you don't want.
2. Is Mehrunes Dagon really the last boss? (If yes, then how is he in Oblivion, or did Battlespire come second, In-Game Universe Timeline wise?)
Mehrunes Dagon is the final boss, but he's not killed. Daedric Princes cannot be killed, only banished back to their own Realms.
3. How does it's Multiplayer work? 2 Players on one computer, or 2 Players over the net?
There is Multiplayer, and the UESP Wiki has info on how to do it http://www.uesp.net/wiki/Battlespire:Multiplayer.
4. Do you still make your own character?
Yes, there is a character creation process, but I'm not sure how detailed it is. I know that you can pick your race and face, and am thinking it is similar to Arena/Daggerfall with the point system.
~TK.R