Taken from windowblinds:
"The template image that is opened here is a graphic file (a canvas) that contains the items you want to add to your skin. The image size is not limited in any way.
After you open an image you can select any attribute in your skin and then select an area on the template you want to be assigned to it.Do not worry about the frame format. SkinStudio does all the image formating that is needed.
As soon as you select the area you want to be copied to your skin, all you have to do is press the [Cut Image] button.
It is done!"
-Mike
[Stardock Support]