Hrm, I'm having a similar problem, but I've dragged my texture and diffused it with my default material. (For some reason I have two...and I delete one and diffuse it to the "default" instead of "default2"). Do I need a .DDS plugin of some sort or something before I do this step? And how to I externalize the texture? For some reason, when I apply the texture to the default material, it changes to a yellowish (very light yellow) colour, though none of my texture includes yellow (a yellow/orange, yes, but it doesn't show up as that).
Also, how do I "externalize" a texture?
Thanks in advance!
(By the way, I followed Highelf's steps exactly in his UV Mapping and Texturing Video Tutorial...though it wasn't on a helmet [rather, it was a sword])