Err... ok, one thing at a time
You don't use dds images in milkshape, in fact I don't even edit dds images. It works like this, you open up your favorite graphics program and make your texture (or skin, same thing really), you're likely to be using layers which none of the aforementioned texture types support so you save one version in your programs native format, for Paint Shop Pro this is .psp files. Then you just save copies, I save it as a bmp file for milkshape and a dds file for freelancer. The texture coordinate map (also referred to as a UV map) and the material names are the only important things when exporting from Milkshape to Freelancer, the actual image filename is irrelevant.
Textures and skins are essentially the same thing. Usually a "texture" is an image designed to tile over 3d objects whereas a "skin" is designed specifically for a particular 3d model. It doesn't really matter though and many people, myself included, interchange the two names at will just to confuse new guys
The textures/skins used in the original Freelancer ships are not what you might expect to see, if you have not extracted a few of them do so now and you will quickly see why you probably won't be able to use them for your custom ship.
Follow the tutorials in Milkshape for the texture coordinate editor, start simple with a box, when you can do that try it again with a cylinder then again with a sphere. Make sure you can can get the texture map to work without distorting the textures or any other visible errors and do things like display different parts of the texture on different sides of the object. Once you have mastered that with these "simple" objects then you can move on to your ship and you'll have a better understanding of everything involved.
It's like driving a car, you don't take someone who's never driven before and give them the keys to a Formula One race car and throw them into a race. Start simple, get comfortable, experiment and develop your own style and methods.
Take a few minutes (hours or days) to search the internet for tutorials on textures and skinning, what works for one game/program is likely to work for another. Starting your search at Milkshape's home page is a very good idea since they will deal specifically with Milkshape and it's limitations.
A few helpful hints:
- Put the ship down and work with something simple first, model it, texture (skin) it and get it in the game.
- Don't worry about Freelancer until you have to, just make your model and make a texture/skin for it. When that is done then you can worry about Freelancer, until then the only important thing is Milkshape and what it can/can't do.
- If you're not sure if something will work, try it, what's the worst that can happen?
- Save your work often and save with different names at different stages, so when you do try something and it doesn't work you can step back a bit and try something else.