Well im writing this for players to better understand what this is.
First your going to need the enc/dec get it here int0thegame.blogspot.com/2007/09/loki-xmd-decryptor-encryptor.html
1.Put that into your C:\Program Files\Cyanide\Loki\Characters\(your char name) Folder.
2.Start>Run>CMD. type the location of the folder EX: CD C:\Program Files\Cyanide\Loki\Characters\(your char name) [ MAKE SURE U HAVE CD INFRONT OF IT!]
3.There are a few XMD files in here, what u want mostly is Characs, and item one. Inventory_item.xmd we will use this.
4.In the CMD Prompt type loki.xmd.exe -d Inventory_item.xmd Inventory_item.xml this wil create a xml file for you to edit.
5.Encrypting: Do above but you would put Loki.xmd.exe -e inventory_item.XML inventory_item.xmd
Explanation on all this enc/dec.
When you Decrypt the XMD it outputs the XML file which you can edit in an XML editor (Google CookTop my fave one) Within this XML is tables of things to edit such as items,skills and such. (YOU CAN DO THE SAME WITH Characs.xmd just follow steps just with using Characs.xmd this file contains lvl and all other stuff.) As for Encrypting, you can either load up Loki, it will automatically put the xml back to xmd or u can Encrypt it back (safer way)
Hope this helped anyone, anything incorrect please comment.