Since
unR shared his process I thought I'd share my workflow.
1. Model & Unwrap
Start with a UV mapped model to be skinned. In my case I am working on the legs of my model.
2. Light Model
Position lights to create a nice gradient across the model. The shading should help illustrate the volumes of your model. I have placed lamps to the front, back, left, right, and below my model. Try to avoid creating areas of pure white or black.
3. Bake
Assign a new image to the model for the bake to be rendered to. In the Render Panel (F10) select the Bake tab, and click the Full Render option. Make sure your model is selected and click the Bake button. The shading should be rendered to the newly created image.
Note: Using Blender 2.49 I had to invert the normals before I performed the bake for the faces to be lit corrrectly.4. Paint
Now for the artistic part. I have applied a gradient map, sampled from the torso, to match the skin tone. From there, I use the smudge tool to define the different volumes, and the brush tool to paint details.
