Technically, all you need is notepad for game files, decent graphics editor for 2D assets (anything that can open/save .tga and .dds files), for 3D models you need a program that can somehow get a mesh to .xsi format. The sounds are in .ogg format, but the game can apparently handle MP3s as well. All of these can be accomplished by free programs.
As to getting started, you'll want the games "reference files" (the base game files are in binary format, these are the game files in a legible format). There is a converter but its easier to download them (see harpo's post). That said you might want to wait a week or two, as a new patch for diplomacy will be released then, and depending on what you are modding, it could break your mod.
