Well, everyone will tell you different, but here's my favourite method:
1) Make sure you have your model in MD2 format.
2) Get hold of NPherno's Skin Tool (which you can find here: http://aeq.virtualave.net/dls/nst-july07.zip ). Then load up your model in that great program.
3) Follow the tutorial for NPherno's Skin Tool at http://www.burnitbaby.co.uk/ (under "Helping Hand", especially the UV mapping walkthrough).
4) By the end of that tutorial you should have saved a mapped MD2 with a skin that has your outline on it... All you need to do then is load up your skin in a paint program and paint over it. It will then fit onto your model perfectly.
5) Just load up the MD2 and skin in MED, convert to MDL, and wahey!...
I know some people think this is an overly complicated way about it, but I really think NPherno's Skin Tool is one of the best tools for laying out a mesh onto a bitmap. If only MilkShape or even MED had such a brilliant skins interface, it would be great. (In NST you just rotate your 3D model, select a number of faces and then drag them onto the bitmap - then you can move the vertices around until you've got good proportions - you'll see what I mean when you download it and see the tutorial).
Hope that helps!
Keith
(Edited for overuse of the word "brilliant": I am not affiliated to NPherno!!!)
