Hello first 2 hours playing with XOOPS and it is defiantly cool. Question is how do you customize? Are you able to design a custom site ontop of it? I have went through all the XOOPS files in dreamweaver and it is all in PHP. Any answers will be appreciated.

Have a look at "A Visual Introduction to Xoops" link on the left under the documentation section. That will give you an idea of what is possible. Also have a look in the Themes Library for what's available there. That will give you the basic idea of what you can do to make XOOPS personal, i.e. look.
If you don't like what you find, then go get the "Anatomy of the Default Theme". This will give you a start on how to build your own theme.

The look in the modules Repository to see what additional functionality you can add onto the core.

Then download the ones your interested inand start playing.

So the asnwer to your question is: VERY. It's all up to you.