So I have read the Read Me in FOMM and Zumbs Guide here (http://zumbs.wordpress.com/2009/11/08/fomm-and-fomods-for-dummies-1/) but admit to not being entirely sure if this is correct (I'm using the Nightmare Realm Quest mod as an example):

1. Open FOMM
2. Click Package Manager
3. Click Add FOMod (and not any of the drop down options: Add PFP, Create from folder, Create FOMod, Edit PFP)
4. Navigate to Nightmare Realm RAR, click Open
5. Follow the steps to allow FOMM to create the FOMOD
6. Double click the newly created FOMOD to activate it

The reason for my confusion is because "Add FOMod" command seems to imply that I am doing exactly that- adding a mod in FOMOD form, which Nightmare, and most FO3 mods I've downloaded, are not. Within the Nightmare Realm RAR, there is the following:
Meshes folder
NightmareRealm hints folder
Sound folder
Textures folder
NightmareRealm.esp
NightMare Realm Read me

Am I correct in thinking that the 6 steps above in FOMM are correctly extracting all the files and fodlers from this RAR file and ordering them in my FO3 correctly?

Part of my confusion stems from the Oblivion Mod Manager, which had the very clearly named Add Archive command for creating OMODs from RAR or ZIP files.

(As a side note, when I tried the Create FOMod command in FOMM on the Nightmare Realm RAR, filling in the blank fields, I got a lot of error messages/symbols, so I figured that wasn't the correct procedure)

I want to make sure I am using FOMM properly to install generic mods in RAR files correctly as FOMODs.

PS- in the cases of RAR files with optional folders or multiple variances of esp files, in which the user should select only one variant, what is the proper method to make that a FOMOD in FOMM?

Thanks.

What you did for this mod is correct. It will create the fomod and then when activated, fomm will copy all the files to the correct locations. In the example you gave above, all the files are in standard locations and directories. The esp's are in the top level of the archive and the directories have standard fallout 3 names (meshes, textures, sound, etc). The NightmareRealm Hints folder will be included in the mod and that directory will be copied to your fallout3 data directory. You have to check each archive and follow install instructions for each one. Sometimes modders could put different esps in different directories for activating different parts of a mod. Also, if you see an archive that has a directory called fomod, that's an installation script and you can just create the fomod the same way you did above, and when you activate it, an installation script will do the configuration for you. Mods like fwe, mmm, plus others have scripts that will open up a window when you install them. If there's multiple esps, optional folders, or other stuff like that and no fomod folder, then you'd have to extract the archive, do all the configuration manually (move around esps, delete the ones you don't need, etc) and then create the fomod by using the Create from folder option. Hope that helps.

Thanks. What about mods like GNR More Where That Came From and various Hi-Res Graphics mods, which have multiple different RAR files that I download. And for mods that have a patch released later in a separate RAR file. Is there a way to handle that in FOMM or is a manual installation better?

It's kind of your call. Multiple archives, you could make a fomod from each one, or extract them all to the same directory and make a single fomod. Same with mods that have patches. You could install the main mod as a fomod and then the patches as separate fomods, or extract it all and make one fomod. For me it usually depends on the size of the mod. Large mods usually take a lot of time to make the fomods, so I'll usually install patches separately when they come out.