You're right. UO has a base paperdoll for each gender, and hundreds and hundreds of different items of clothing, hair styles, weapons, and misc. items to tile on top of the paper doll. Each of these has every conceivable animation set it could go through drawn out, from swinging a sword to standing there to dying to riding a horse, and everything is stuck together in the correct order with the correct colors to show your character.
(I know this because I worked for several months on an Ultima Online server emulator, and I have a program that lets me see all the tiles. It's actually pretty interesting to look at.)