Vertex Painting
Here’s an exercise you can
do to learn about vertex painting.
Note that there seems to be
a bug in version 2.5 alpha 2 which interferes with vertex paint if
you choose texture paint at any time. DO NOT CHOOSE
TEXTURE PAINT and be sure to save your work extra often when
working with vertex paint.
Start Blender, delete the
default cube and add the monkey mesh. The monkey mesh will be facing
the sky but you can make her face forwards (her name is Suzanne, by
the way) by doing R, X, 90, Enter on the keyboard (i.e.
rotate 90° about the X axis). Suzanne probably has a rough shape
made of obvious flat faces – you make her look smoother by turning
on the Smooth option in the toolbox at the left of the 3D
window (if you can’t see the toolbox press T). But if you look
closely (and maybe zoom in) you will notice that the edges of
Suzanne’s head are just as rough as they were before, so Smooth does
not actually smooth the shape, it simply smoothes the colours
within each face so that the edges between the faces are less
obvious. You can convince yourself of this by going into wireframe
mode (press Z) and you will see that that the original crude set of
edges has not changed. Press Z again to exit wireframe mode.
Vertex Paint mode actually
works better on a shape that is truly smoother (i.e. more faces, not
just recoloured faces). To increase the number of faces and get a
smoother shape we will use the subdivision surface modifier
(also called subsurf). See the
Modifiers page for more information about the subsurf
modifier. With Suzanne still selected in object mode, click the
Modifiers icon and add a Subdivision Surface modifier. Set the
subdivision levels to 2 for viewing and 3 for rendering.

Explanation to finish.....
UV Unwrap
As previously stated, this method is not
explained on this site, but I thought you might like to see a couple
of images showing the Suzanne monkey head being unwrapped, painted
and then rendered:
Here is the flat UV image. The two circles at
the bottom are the eyes:

The UV unwrap being painted:

The finished result, with the UV surface
applied to Suzanne's head and then rendered:

These images are from
HERE.