Welcome to the XBMC forums.
To use XBMC in library mode, you first have to scan your media files so information about them are added to the respective libraries, as explained here:
Music_Library (wiki)
Video_Library (wiki)
Afterwards, you will be able to view/select your media by categories such as Title, Artist, Album, Actor, Genre, Year, Director, etc., depending on the media type.
I suggest adding one type of media to the library at a time so the task won't seem so daunting. Adding music to the library is relatively simple, since it reads the ID3 tag information embedded in the mp3 files themselves. For videos, it's takes a bit more planning and organization to ensure the files are added correctly to the library. For movies, it's typically getting the filenames to match the movie titles used in an on-line movie information site. For TV shows, you also need to name the files with the season and episode numbers used to identify each episode in an on-line TV show information site. There's also a capability to define your own movie/TV show description files that can be used to override or supplement the information obtained ("scraped") from the on-line info sites. The links above explain all this and provide examples.
