1) Rip your game DVD to ISO format with ImgBurn (do not use any other formats!).
2) Extract the contents of the 7z file to a directory, like say, C:\ToD2. Move the ISO you just ripped to that directory as well. Rename the .delta patch file if you want to make it shorter.
3) Run patch.exe. Follow the prompts. If everything went well, it'll take a few minutes to create the patched ISO.
4) Burn the ISO to a writable DVD and play it in your modded PS2. You can also try the PCSX2 emulator, but it doesn't run the game very well and has serious issues that break some of the game features.
Alternate step 3 for more advanced users: Command line usage for Xdelta3 is:
xdelta3 -d -s inputfile patchfile outputfile