Here are the steps needed to store a new modified palette from an image (PNG).

First, you need to have what i called a matrix image of the sprite/background/whatever you want of modify.
To do that, you'll probably need a special Mame version, able to disable sprites/BG to catch only th right part of the screen.
Another great tool is AnimGet to automatically take screenshots when screen content changes. Not mandatory but it will make things way faster....

I'll use the "Q portrait (Normal)" entry as example.

** 1 **
- Go to Modified palette tool
- In left menu, click on Patch process and select the palette. Here, i choose "Character Select Screen" then "Q portrait (Normal)".
- Tick "Patch with unique colors only!" box (no need to tick the one above)
- Generate the patched ROM 51, download it, create the new rom with this and install it in roms folder of Mame.
- Once in the game, go to the part needed to display what we search. Here, i go to the select screen and go on Q: the portrait is displayed with the matrix colors.
- Then, i have to separate other sprites to only have the Q one, using shortcuts of special version of Mame:
	--> Shift + 1 to hide background layer
	--> Shift + 3 to hide health/super bar if you're in a fight
	--> Shift + W until the Q portrait disappear
	--> Shift + Q to make it displayed again
	--> Shift + D to make it the only one displayed on screen, all the rest should be pink
- Once sprite is isolated, take the screenshot (F12 with Mame)

Note: If you're ripping an animated sprite (like a fireball), it's a good idea to try to capture a significant number of this animation to get the highest number of colors of the palette. 
(see Gouki triple fireball i've done to have a better idea)
Another point is to be careful with all layers of the animation:
for the fireball example, there is a layer with the fireball itself and one other one with the impact, but both share the same palette: you have to capture both!
Same method than before, using Shift + P to advance by one frame at a time, Shift + T to display all layers and search for the good one again.
Not really harder, it just makes things longer to have the best result...

When done, just merge all images in only one, and make the final image as smaller as possible, but still at the same scale of the game...

- Now, go on UpdatePalette tool
- fill in filter field with Q to display only Q related palettes (Q for my example only of course ^^)
- for the palette "Character Select Screen" / "Q portrait (Normal)", click on "" link and upload your image.

If a previous image has already been uploaded but you want to change it by the new one, click on "" link and upload it again on bottom of new window.

- Now, a new "<(E)>" link should be available in the "View palette" column, before "    <(L)>".
- Click on it. This should open a new window, and after a few seconds (depending on size of the image and number of colors of palette), the matrix image should be displayed.

On this screen, you have:
- on the left:
	--> the palmod code of the current image displayed
	--> the button below will load the code of previous field (where you can paste another code to test it)
	--> the button "Get palette code from image" will allow you to upload a modified image (with photoshop or other soft) and get the corresponding Palmod code (in the field above)
	--> many links (at least 3) to load respectively:
		* original rom 51 palette
		* the palette used when you firstly launch this page
		* the matrix palette
		* if palette is about a character in game colors, all 7 original palettes (LP/MP/HP/LK/MK/HK/EX)
		* the already modified palettes stored in the Modified Palette tool if there are some.
- on middle:
	--> image made with the Palmod palette on the left top field
	--> a zoom field
	--> a color picker field to change background color of the image
- on right:
	--> a view of the palette currently loaded
	--> a button to switch to edit mode, which allow to change a color of the palette and see result on the image.

Image may seem to not load sometimes, click on the zoom button (whithout modifying the zoom value) to load it again and it will probably work better. If not, well, i don't know :p

So, back to our business.
You want to edit image from one of the links in left part: original colors or one of the other.
Click on the one you want, image will be displayed, save it (image is displayed as a HTML container's background, so with firefox, you have to right click on it and select "Display the background image" or something like that, and then save it).
Once saved, modify it like you want, but without changing size, and save it in PNG format.
Then, you just have to upload it on the tool by clicking on the button "Get palette code from image".
After a few seconds, corresponding code will be displayed in top left field and image displayed should be the same as the uploaded image (if the original image palette has not been messed up of course...).

If result is convincing, you can store it in the Modified palette tool by copying the current palmod code.

That's all folks!