The basics of modding: either modify existing game resources or create new stuff and figure a way to make it appear in the game.
The XML files are relatively easy to mod in Notepad. You can use the tools supplied in Twilight's Tools folder for some modding tasks, like modifying the racial-specific tech trees.
Obviously, overwriting your original game resources is a bad idea, so instead you create a mod folder and copy the things you want to change into that folder, and change the copies. When you change the mod folder which the game points to, and it loads the mod, it'll automatically create a ModDescription.xml file and the necessary folder structure for your modded data to go into. Note that this mod folder structure is not always the same as the game folder's directory structure, so if a particular file doesn't work you may need to move it to a different folder in the mod.
The great part is that you don't need to include any files which you didn't change, because the game will load them from the original install location.
Once you've grasped all this, it's not hard to see that you can merge mods together quite easily, so long as they don't change the same resources, the same way you would merge any other pair of folders together in Windows.
