Definitions:
1) MM - Mod Manager.
2) Mod (or Folder Mod) is a directory inside "<HoMM3 dir>\Mods".
It's loaded by Era II (if listed in file "<HoMM3 dir>\Mods\list.txt").
It's NOT considered as Mod by MM, if it's name starts with "_backup_" or "_ignore_" or "_version_"(case insensitive). Game will still load it, if listed in file above.
3) Mod ID is a name of it's directory.
4) Packed Mod is archive contains directory <Mod ID> inside directory "Mods\" from archive (supported types: http://7-zip.org/).
If there is others files in root directory of archive - this archive are considered as Bad Package (see definition below).
If there is multiple <Mod ID>, MM will correctly process it.
5) ModInfo - a file mod_info.ini inside directory <Mod ID>.
It contains a information about mod, such as it's Name, Name of author, Website address, Mod version and some more.
Encoding of this file must be Unicode (in Notepad, UCS-2 Little Endian in Notepad++)
Field Version is only one field, that required to be filled. If there is no this field (or it contains invalid value or there is no file mod_info.ini and so on...), that mod (Folder Mod or Packed Mod) is considered as bad.
6) Good Package is a Packed Mod contains ModInfo with valid field Version.
7) Good Upgrade Package (or just Upgrade Package) is a Packed Mod contains ModInfo with valid field Version AND with valid field MinVersion.
MinVersion indicates a... minimum version, on which this Upgrade Package can be installed.
8) Bad Package is a Packed Mod, that cannot be considered as Good Package or Upgrade package.
9) Bad Mod is a Folder Mod, that contains invalid data in field Version.
10) Mod Type is a field in file ModInfo, that contains info about this mod type. It used to change default MM reactions with incompatible or compatible mod list.
There is a 3 different values for this field:
Interface change (referenced as "interface") is mod, that changes a small aspect of the game and thus generally compatible with almost any mod.
New feature (referenced as "feature") is a mod, that changes a some (not so many) aspects of the game and are generally compatible with other features and interface changes. This is default mod type.
Total conversion (referenced as "conversion") is mod, that changes many aspects of the game and therefore generally incompatible with any other mod (except interface changes).
The rest compatibles and incompatibles can be set with ModInfo.
When you enable mod, all incompatibles mods will be disabled (after prompt). This behaviour can be changed in options.

Version numbering:
MM uses following scheme: <xx:year>.<xxx:version/build>[X.subversion][.type] (13.001 or 13.065.beta or 13.099.2 or 14.001.24.a)
Year is two last digits of year
Version is just consecutive increasing number.
Subversion need in case, if you fix a very small part of mod and don't think, that this is enough for new version.
Possible "type" values is:
"normal" (or blank) - indicates a good version, that well tested and shouldn't contain any bugs.
"beta" (or "b") - indicates a public test version, that may contain some bugs, but all features must be worked.
"alpha" (or "a") - indicates a test version, that may contain bugs or/and with missing features.
When comparing a two version, one will be treated as newer:
If "year" is greater on this mod, else
If "version" is greater on this mod, else
If "subversion" is greater on this mod.
"type" is ignored, but may be used in future updates.

Mod creations is easy . Follow these steps:
1) Hit a button "Create New Mod", enter it's name and some additional info.
2) Develop your mod.
3) Click button "Create Package".
4) Give created file to the community .

Mod updating is very similar:
1) Click button "Create Backup" (this action will be done automatically on creating package).
2) Update your mod. Don't forget about Version!
3) Hit button "Create Upgrade" and select Minimum required version.
4) Give created file to the community .