Step 1. Sketch out your ideas.
This is the most free-form phase of the process. Have fun with it and let your creative juices flow! I normally keep a sketchbook in my bag, and when I am inspired I start drawing!

Step 2. Purchase image editing software.
You will need an application capable of alpha channels and producing Targa images. I recommend Photoshop which retails at $599.

Step 3. Research your design.
This is an important step to ensure your design doesn't inadvertently mimic that "style and dress" of a real life fashion design. Any web search engine is a good place to start. Enter the word "clothes" into Google(tm) and search through all the returned links. Next you should go to your local library and examine back issues of fashion journals, such as Women's Wear Daily(tm). Older issues are sometimes archived on microfiche.
Step 4. Make your outfit!
So, draw something on the SL clothes template. Whatever. it's all good. Your end product will be a 512x512 32bit tga. This image is your product!
Step 5. Name your outfit!
Once you come up with a name, you should go to http://www.uspto.gov/ and do a search for your name to ensure it is not a registered trademark of another company. For example, say I want to call my outfit "chic"...
1 79011745 FULLOFCHIC TARR
2 79005220 MOON CHIC TARR LIVE
3 79009694 POP CHIC TARR LIVE
4 79008532 CHIC & BRANCHÉ TARR LIVE
5 79008436 PERE VENTURA CHIC TARR LIVE
6 78681621 CHIC & FABULOUS TARR LIVE
7 78436365 FASHION CHIC TARR LIVE
8 78677725 SUNSHAIDE CHIC TARR LIVE
9 78676755 ARAMOUNI'S HEALTHY GOURMET TARR LIVE
10 78265703 2981877 AMERICAN CHIC TARR LIVE
11 78484662 NAIL CHIC TARR LIVE
12 78673993 COCOACHIC TARR LIVE
13 78463827 COASTAL CHIC HOME FURNISHINGS TARR LIVE
14 78673032 COCOACHIC TARR LIVE
15 78437197 TAZAH TARR LIVE
16 78424396 CHIC BY H.I.S TARR DEAD
17 78391732 LE CHIC CHICK TARR LIVE
18 78452871 TRICHIC TARR LIVE
19 78672421 NYCHIC TARR LIVE
20 78672192 FISHCHIC TARR LIVE
21 78501351 CLASSIC CHIC TARR LIVE
22 78411673 DOLLIEQUIN TARR LIVE
23 78669614 RUSTIC CHIC TARR LIVE
24 78667834 GEEK CHIC TARR LIVE
25 78667352 BONE CHIC TARR LIVE
26 78511480 A CHIC AND SOPHISTICATED LOOK AT URBAN TRENDS IN A SUBURBAN CLIMATE TARR LIVE
27 78666942 MOMMY CHIC TARR LIVE
28 78298084 2961245 VECCELI TARR LIVE
29 78664395 MAKEUP CHIC TARR LIVE
30 78312097 SOLEIL CHIC TARR DEAD
31 78310576 CHIC CHOCOLATES TARR DEAD
32 78663121 CHIC KNITS TARR LIVE
33 78254220 EASYTWIST SPORT EXTREME TARR DEAD
34 78254219 EASYCLIP SPORT EXTREME TARR DEAD
35 78236620 TWISTY TARR DEAD
36 78659644 C'EST CHIC TARR LIVE
37 78411672 TAHLIA TARR DEAD
38 78411669 FIONA TARR DEAD
39 78409783 HOT CHIC CLUB TARR DEAD
40 78656828 SHANGHAI CHIC TARR LIVE
41 78523105 CHIC VOYAGER TARR LIVE
42 78451166 COTTAGE CHIC A LIFESTYLE STORE TARR LIVE
43 78378267 CHIC GIRL TARR LIVE
44 78373709 CITY CHIC TARR LIVE
45 78339721 CHIC PREMIERE TARR DEAD
46 78411667 KIARA TARR LIVE
47 78411671 ASIANA TARR LIVE
48 78282881 ETHNIC CHIC TARR DEAD
49 78651479 BORN CHIC TARR LIVE
50 78547037 CHICLETS TARR LIVE
51 78452290 CHIC JIC JUST IN CASE TARR LIVE
52 78401630 PAW CHIC TARR LIVE
53 78157494 CHIC TARR LIVE
54 78322585 CHIC SWEETS TARR LIVE
55 78636374 TROPHY CHIC TARR LIVE
56 78647317 BÉBÉ AU LAIT NURSING COVERS FOR CHIC MOTHERS TARR LIVE
57 78511523 THAT CHIC BOUTIQUE, CLOTHING & ACCESSORIES TARR LIVE
58 78402078 BABYCHIC COUTURE TARR DEAD
59 78451334 FLABBY CHIC TARR LIVE
60 78451328 TROPICAL CHIC TARR LIVE
61 78367676 CHIC SHINE TARR LIVE
62 78426572 PET CHIC TARR LIVE
63 78411674 PORCELIQUE TARR LIVE
64 78397490 TACO CHIC SALSA TARR DEAD
65 78641186 LIPCHIQUE TARR LIVE
66 78100600 SHOPPING CHIC TARR DEAD
67 78639189 COWBOY CHIC TARR LIVE
68 78448637 EASYMAG TARR LIVE
69 78448615 CARGO TARR LIVE
70 78413802 2959864 CHICCLEATS TARR LIVE
71 78634251 BOHO CHIC TARR LIVE
72 78633069 SIMPLY CHIC TARR LIVE
73 78483033 CHIC RETREATS TARR LIVE
74 78296194 CLIP N' FLIP TARR LIVE
75 78391986 LE CHIC PARISIEN TARR LIVE
76 78629535 SISTERCHIC TARR LIVE
77 78394911 RUE CHIC TARR DEAD
78 78498904 CHEEKY & TEAL TARR LIVE
79 78511083 HIDE AND CHIC TARR LIVE
80 78331854 2951523 SO CHIC TARR LIVE
81 78624384 COCOACHIC TARR LIVE
82 78384991 FOOTBALL CHIC.COM TARR DEAD
83 78620889 CHIC WIGS TARR LIVE
84 78370660 TRACHIC BODYWEAR TARR LIVE
85 78242099 SUITCASE CHIC TARR DEAD
86 78603671 KNITMANIA TARR LIVE
87 78614795 CHIC TARR LIVE
88 78598921 BALI CHIC TARR LIVE
89 78614297 BRATZ ROCKIN' CHIC TARR LIVE
90 78441828 TREND CHIC INC. TARR LIVE
91 78441075 FLABBY CHIC TARR LIVE
92 78402632 KNIT CHIC TARR LIVE
93 78387361 COMFORT-CHIC TARR DEAD
94 78128944 CHIC BOUTIQUE TARR DEAD
95 78435674 RACE CHIC TARR LIVE
96 78609820 CHICKY CHIC TARR LIVE
97 78579618 B. CHIC TARR LIVE
98 78575992 CHIC BLVD TARR LIVE
99 78379556 FIX-IT CHIC TARR DEAD
100 78604418 CHIC KIDS TARR LIVE
Ha ha. just kidding. Chic(TM) is right out. You need to be very creative with your names to ensure uniqueness. Sometimes companies invent their own words, such as Kazaa(tm). Try it yourself... "Glopiebloo", "Blarpiforb", or "f6abf9f0-0a78-11da-8cd6-0800200c9a66".
Step 6. Consult a trademark attorney.
It's not required that you register the name of your outfit as a Trademark, but you should still have a TM professional research possible conflicts with other names. This search is more comprehensive than the simple TM search on the PTO web site and typically only takes a few weeks to complete. The result is a 3 ring binder filled with registered trademarks that may cause potential conflicts. This search comes at a nominal fee ($600 - $1500).

Step 7. Box and sell your new outfit!!!
This is the fun part where all your hard work and expenses finally pay off and you start raking in tens of dollars every month.
Question: What if a large designer corporation like Calvin Klein(tm) starts using the designs and names *I* originally created in Second Life?
Answer: Just as Second Life users may accidentally stumble across RL Trademarks, it's possible for RL companies to use OUR trademarks since they are unaware that we exist. If this happens, you should write a Cease & Desist letter to them. I recommend hiring an Attorney to help you, but the letter will go something like this:
Mr. Klein,
It has come to my attention that your Fall '06 fashion line features an outfit that is using the same name as a Targa (.tga) file that my avatar sells in a video game called Second Life(tm). You have until the end of this month to remove the offending item from your stores, from resellers, from your television commercials, and any promotional materials. Failure to do so will result in serious legal action.
Sincerely,
LuvFunz Ambassador
It has come to my attention that your Fall '06 fashion line features an outfit that is using the same name as a Targa (.tga) file that my avatar sells in a video game called Second Life(tm). You have until the end of this month to remove the offending item from your stores, from resellers, from your television commercials, and any promotional materials. Failure to do so will result in serious legal action.
Sincerely,
LuvFunz Ambassador
Hope this helps!