From what I gathered on my simple custom model a while back, this is how you'd do it:
1. Create the texture in Photshop/Gimp - you need the nvidia dds plugin for photoshop to open and export .dds files.
2. Assign the texture(s) (.dds file) to your object inside of the editor (I used Blender in which you went into the UV Editor if I recall correctly).
3. Export as OpenCollada format (.dae)
4. Open the .dae file in the model
viewer and your .mat and .msh files should be created automatically if all went well.
5. Import the mesh in the model
editor and adjust it how you feel fit (additional lights, etc) and save it as .ent
6. Open the level editor and spawn your object and save the map.
7. Start or reload the game if it already is started and you should see your object if everything worked out.
If the object is pink in the model viewer and invisible elsewhere, the texture is not assigned correctly inside the editor.
Bear in mind that I'm no expert and I'm only citing from memory. It should hopefully be of some help, anyhow.
Feel free to reply if you need additional assistance and I'll try to supply just that
Good luck!