On it's own, the plugin will not always smooth a gradient of tone without producing 'steps' as can be seen in the background of this image which is a smooth transition from light to dark.
Tweakie, just out of curiosity I would try engraving the same image rotated by 90°.
John, I think the plugin outputs equal length pulses for each pixel. As far as I understand it's the spacing which creates the toning.
EDIT: Found original Art's description:http://groups.yahoo.com/group/mach1mach2cnc/message/74912