Does anybody know how the point system works?

You get to choose what sort of armies the faction is able to build, what sort of mercenaries can be recruited, what allies and what heroes are available. Each come with different points, but the points change depending on where you place them. For example, dragons cost several thousand points if you place them first in the mercenaries or allies roster - but cost less the further down on the list you place them.

This might make sense, I suppose, if the ones listed first are the most common, but there is no indication of that. Worse still, the same applies to the regular army units as well, where the order certainly has no consequence. Regardez:

If I edit the Dark Dwarf side, I find Dwarf Crossbows in the nr. 4 slot, and Griffons in nr. 8. They cost 46 and 68 points respectively, for a total of 114 points. If I swap them around, however, so that Griffons are nr. 4 and Dwarf Crossbows nr. 8, they now cost 88 and 36 points respectively - totalling 124 points.

Since we are limited to 2000 points per side, this is something the player should be mindful of. But is there a reason for all this? A method to the madness?

Yes, the main reason is that the earlier the units are in your roster, there more likely it will be that they are available to build in neutral cities you conquer. Also, dragons are extra expensive if you put them before slot 7. There may be other details, but you'd need to look through old Wl3 fansites to find more info.

Unfortunately, the manual on page 39 has less than half a page dedicated to it. I believe it all comes to balancing the game properly so no side has an unfair advantage over the other.
If you do want to give a side you play an advantage, one way is to choose personalities (one of my favorites). I choose this when Sometimes I set up a game of one player against an alliance of 4 or 5 AI players and give myself an extra personality to spice up the game even more. The game is amazing, it has so many options, yet is still simple and superb.
(On personalities see page 10.)

I noticed that the Giants preset is actually over 1000 points or whatever the limit is. You actually have to edit it in order to use it.. Must have been overlooked back whenever they updated it.

Not sure how readable this is going to turn out, but I found the precise formulas I dimly remembered reading somewhere.

* DARKLORDS RISING v1.02 SIDE CONSTRUCTION FORMULAS *

For each choice, compute base cost, then apply applicable modifiers in order.

Army slot 1: 2 * UBASE (*1.5 if DRAGON)
Army slot 2: 1.5 * UBASE (*1.5 if DRAGON)
Army slot 3: 1.4 * UBASE (*1.5 if DRAGON)
Army slot 4: 1.3 * UBASE (*1.5 if DRAGON)
Army slot 5: 1.2 * UBASE (*1.5 if DRAGON)
Army slot 6: 1.1 * UBASE (*1.5 if DRAGON)
Army slot 7: 1 * UBASE (*1.5 if DRAGON)
Army slot 8: 1 * UBASE (*1.5 if DRAGON)
(Duplicate penalty: +100 for second use, +200 for third use, etc.)

Merc slot 1: 2 * UBASE (*6 if TIME>1) (*3 if BUILD>1000) (+1000 if DRAGON)
Merc slot 2: 1 * UBASE (*9 if TIME>2) (*2 if BUILD>1000) (+1000 if DRAGON)
Merc slot 3: 1/4 * UBASE (*12 if TIME>3) (+1000 if DRAGON)
(Duplicate penalty: +100 for second use, +200 for third use, etc.)

Ally slot 1: 2 * UBASE (*3 if TIME>3) (*3 if BUILD>1000) (+1000 if DRAGON)
Ally slot 2: 1 * UBASE (*5 if TIME>4) (*2 if BUILD>1000) (+1000 if DRAGON)
Ally slot 3: 1/3 * UBASE (+350 if DRAGON)
Ally slot 4: 1/5 * UBASE
(Duplicate penalty: +100 for second use, +200 for third use, etc.)

Ship type: (tbd)

Hero slot 1: 1 * HBASE
Hero slot 2: 1 * HBASE
Hero slot 3: 1/3 * HBASE
Hero slot 4: 1/5 * HBASE

Stack Limit: (4,5,6,7,8) => (0,300,500,700,800)
Mercenaries: 35
Sell Items: 20
Start Gold: 1 gold/1 point (500 gold max)
Mana: (None,White,Gray,Black) = (35,40,80,40)
Max Mana: 1 mana/10 points (30 mana max)
Start Mana: 1 mana/2 points (up to max)

----------------------------------------------------------------
UBASE = (Cost to build Unit in city) / 11
TIME = (Production time for Unit)
DRAGON = Any unit with "Dragon" in name
HBASE = 8 * (Experience required for Level 2)