You really want to go and have a look around
http://www.utskins.com - which is a great place to start learning.
Basically all you need is some version of
UnrealEditor (comes on the second CD, or in patches 413 and 420), a
graphical editing program (MSPaint will do, but Jasc Paintshop Pro and Adobe Photoshop are the best), and a
text editing program.
The tutorials at UTSkins will help you a lot, but I suggest reading the LOD one first (it helped me more than the others).
And here's what you can do!!!:
This is the red team skin from my latest venture (aren't I cool?).