to wet sand all you do is sand with water.... it's as easy as it sounds.. i just used a squirt bottle and wet the surface.. then go to town with the sandpaper. I did mine by hand and it worked out VERY well
wet sanding is better for things that are supposed to look nice to my recollection. You wet sand primer before painting, you wet sand runs out in paint, and you can wet sand out some scratches. Make sure you use a high grit sandpaper when sanding your headlights.
Mequires Scratch X has worked wonders on my yellow lights. They certainly arent perfect cuz they are 9 years old but they are MUCH MUCH clearer. As clear as you could expect them to be. If you use this stuff though you have to use it consistently in order for it to work. Kinda like going to the gym. you cant expect a miracle by going one time. After about 3 or 4 uses I could tell a big difference and its only like $8 a tube.
like already said, wet sanding leaves a better finish....the last sanding jobs on paint is USUALLY a wet sand. I used 1000 grit sandpaper.. some use even a finer grit. Then use metal polish to make them crystal clear!
Here is my lights before and after. In this pic I JUST did the inside corner lights. The one on the left has already been cleaned... the one on the right hasn't. These were done with the process i outlined above.