Does this mean you use 3 texture units with 3 textures (C0 .. C2) ? But I thought most graphic cards would use "just" two texture units...
Yes, you can use only 2 textures at given stage - but you can Cn to be texture color, texture alpha, object color, object alpha, constant color, constant alpha, with texture being current one or result of previous stage. This means 8 possibilities for each component.
In most cases you will set C2 to alpha of one of the components which will be a control parameter of interpolation between colors C0 and C1. Colors C0/C1 can be texture/object color/constant color depending on what you need for particular stage.
Think about it as a DECAL on steroids.