The official Dungeon Siege website have posted an article about the creation of templates in Dungeon Siege. Here is part of it for your viewing pleasure:

At the most basic level, a template tells the game engine how to use certain game resources - such as art, sound, and physics properties - to create (instantiate) a game object (rock, tree, sword, a Krug, etc.) in the world. A template is simply a block of text that defines the characteristics of a game object.

When modding a game, one can either modify the content already included in the game, add completely new content, and most often a combination of the two. The need to create a template arises when a mod developer wishes to add content to the game or use the existing content in new ways, without losing any functionality of the existing content. For instance, if you would like to create a new sword with completely new art, you should create a new template for it. In the same vein, if you wish to create a new sword just with new stats, you should create a new template so as to preserve all of the already defined swords in the game. These are not laws, of course, but rather guidelines as to the purpose of creating your own templates.