Each species has its own population (colony) on a system body. Those populations reproduce normally, each to their own race. (On a side note, this is an amusing way to use specialized civ-admins.) You don't need a modification station after the modifications have been done.
Of course, I've never actually done any GM myself, so take my words with a grain of salt. :p
EDIT: Old topic:
http://aurora2.pentarch.org/index.php/topic,2396.0.htmlNot a lot of detail in there though.