Ok, if you asked before then why don't you use the search button? Anyway...Any software will do as long as it is a quality decal...I would suggest Photoshop, but if you want something for free, try GIMP
And here is a short tutorial:
Make 2 versions of your decal, one should be 256x256 and the other 64x64
When you have made the decals, place them here:
64x64: C:\Program Files\Blockland\base\client\ui\avatarIcons\face
256x256: C:\Program Files\Blockland\base\data\shapes\player\faces
And remember, if you want other people to see them make sure you post them on the forums.