Normally, settings files are located in the program files directory, but it depends on where you told Impulse to install your games. For Twilight of the Arnor, the default location for settings files would be as follows, if I recall correctly;
User specific files are normally located in;
C:\Documents and Settings\<username>\My Documents\My Games\GC2TwilightArnor
The .raceconfigxml files there can normally be modified without concern, but it's best to delete them prior to starting a Metaverse game. The game rebuilds those based on settings chosen in the game setup.
Again, don't modify the original settings files, copy them to a mods directory first. Of course, if you have no desire to post games, it's not an issue. Here's where modified settings files would typically go based on the path above;
C:\Program files\Stardock\Games\GalCiv2\Twilight\Mods\<my mods dir>
I believe you can put a mods directory anywhere as long as you tell GC2 where to find it in the game setup. I don't know for sure though because I always place them in the game's installation path.
I really enjoy casual modding so I'm sure you'll have fun with it.