This folder is mainly used for storing custom object textures. They can be in any file extension. To use them in editor, you need special kind of objects (that are not provided officially) that have "TextureName" object parameter which is actually not visible. Emerald141's SuperAdjustable Objects Package contains those objects.
You need to provide the full path of file you use in this "TextureName" adjuster. The default value is usually "!None". If the file doesn't exist, the player with crash with "Couldn't Load Texture" error. Also, the editor will not show you the texture.

Note: The folder UserData\Custom\Objecttextures can also be used to store object textures but it works differently. Read the "readme.txt" in that folder to understand.
