I just played around with it and I think I see how it works now.
Like the doc says, first you need to drag / drop your ROM over "cutter.bat" which will produce all these folders and files in your ROM directory. "patch.bat" is what you do everytime you want to insert sound effect data.
After running you ROM through "cutter.bat", you'll see a few files and two folders. The 2 folders (portXsnd) contain .bin files for each sound effect, where port0snd files are played by writing to $1DF9 and port3snd files are played by writing to $1DFC. The value stored to play the sound effect is included in the .bin file so the code to play the Yoshi sound:
Corresponds to port3_1F.bin by default. There's a list (sndlist.txt) that contains the paths to the .bin files to insert for each sound effect.
http://www.smwcentral.net/?p=thread&pid=54581
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As for the .bin files themselves, they use the same format as music but here you need to deal with them in raw hex. You're dealing with raw N-SPC commands here. Mattrizzle posted a neat reference for the commands, including a link to the .txt with bytes to play for a given note. Always terminate a .bin with 00. By changing the contents of a .bin and running patch.bat again you can change how sound effects are played in game.
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There are some 'tone' files, but I'll go through just sndtone.bin for now. Each set of 9 bytes represents how a particular sample is manipulated during playback of a sound effect. When a DA XX command is run (ALWAYS at the start of a .bin, otherwise you have no set sound to work with), the XX decides which set of 9 bytes to load.
00: Volume left, value from 00-7F. Greater values inverted phase.
01: Volume right, see above. Volume is usually overwritten by a command in the .bin file.
02: Pitch Low
03: Pitch High (these mean nothing as playing a note overwrites the pitch)
04: Sample #. This one's important, it defines the sample # used for a sound effect when this particular entry is loaded. This is the same sample # you find in the sample tool, so you can effectively use the unused entries now (00-3F, like in the tool).
05 - 07: Envelope, pretty complex so not going to bother explaining this. Maybe another time. Defines how volume is controlled during playback.
08: Base frequency, not so sure about this one.
There's also a bgmtone.bin which is like the above, but for music instead (THIS is what gives you new instruments).
00: Sample #.
01-03: Envelope
04: Base frequency.
extone.bin seems to be for percussion, I'm not sure.
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So, this tool basically means new instruments and new samples in conjuction with my sample tool. There is no need to pick samples carefully since now oyu can just insert into an 'Unused' slot and make the tone file entrie's sample # point to that previously unused sample. Very nice tool. I'll be sure to mess around with it some more.