Explaination of LXFML file contents
The LXFML file is an XML document, and there's an XSD document that you can use to validate any LXFML file, along with a textual description of the tags on the LUGNet forums supplied by the LDD Team a few years ago:


  LXF files - info and XML schema


The key parts of the LXFML you're going to be interested in start with the &lt;Scene&gt; element, which contains one or more &lt;model&gt; elements, which in turn contains one or more &lt;group&gt; elements, which are made up of &lt;part&gt; elements.

The tricky part is getting from a &lt;part&gt; element to an actual model:

&lt;Part refID="0" name="m3680_turn_plate_2x2__lower_part_0" designID="3680" 
      materialID="1" assemblyID="74340" assemblyRefID="0" 
      angle="0" ax="0" ay="1" az="0" tx="0" ty="0" tz="0" /&gt;


As you can see, the Design ID corresponds to a LEGO element [part:3680] so you'll need some way to get from those to a suitable model - I recommend taking a look at either:


BricksViewer - A Java app for viewing .lxf scene files - also has a brief discussion of the .lxf and .lxfml formats.
LDXNA - An XNA library for importing LDraw models - it does include an .lxfml document in one of its examples, but I don't recall it using it - however it does show you how to convert the LDraw parts library into a usable format.