Is it possible to modify the xml files to create an entirely new association? with fewer conferences and fewer teams?

Not at the moment... you can change the conferences and teams, but if you reduce or add it will throw off the scheduling.

Is there any way to modify the scheduling? :-) I am running an online fictional league of just 16 teams.. I was hoping to shrink the number of college teams down proportionally to make sure the talent level is even with the pro league for draft purposes.

Not at the moment... the game is based on realistic college environment and schedules. I'm not sure how well it would work to significantly alter the number of teams and games.

You could run a normal college league and then just filter out draftees from certain colleges or conferences.