I'm glad that you are both willing to do dialogs.
If you don't understand anything, just ask. I'll try my best to explain anything.
If you want to do something but not sure how, just post you idea on the board, I'll show you how to do that.
That XML is just text based form of nested object tree, so don't loose too much time with that.
Dialog is divided into set of states, each consists of what character says to you (in one turn) with set of player responses for that. Each response is what player says to the character with action what that response is supposed to do: Move dialog to another character state, and/or to start a sex scene, or go to different place/zone. So each state is character speech turn, player's turn is the responses.