*continues explanation from "add the wad"*
When the MD2s have no texture(Player.png/PLAY.png/etc.), they wrap the sprite that would be used if they were inactive around themselves. For example, if you're playing as Sonic and your MD2s have no skin, the MD2 will wrap sonic around its shoes, resulting in an "Arachnoid Thingamawhatzit" appearance.
By loading a WAD from the wizard series (wizard 1, 2, 3, 4, 5, and, most recently, 6), you replace Sonic's sprites with an image of the skin. And when the image of the texture is wrapped around the model... It creates an illusion of color changing models!