The left side of the image is the "SkinExample.dds". This where the main part of your skin will be done. Simply paint over the white sections with the design of your choice.
The right side of the image is the "SkinExample_palette_uv1.dds". This image is used to define which parts of your skin can be colored by the color selector. Red is the first color, Green is second color and blue is the third color. If it is transparent it will not be colored.