These files are read by the faces(1) command which uses them to display in its window, a small image for each user's mail box message.
face files are usually created by rescaling either a gif or jpg image.
jpg -c myface.jpg | iconv -c m8 | resample -x 48 -y 48 > myface.1
If the image contains more than just your face or if the exposure is non-optimal, Russ Cox has written a tool which allows you to trim and adjust your image, though this only writes black and white images.
Mug insists for its input to be at least 100x100 pixels and the line below adds a white border around the image which is useful - giving you room to maneuver when editing.
jpg -c myface.jpg | resample -x 100 | crop -b 255 255 255 -i -30 | mug > face.1
The manual page is mug(1).
Once you have created your face, install it in /lib/face/48x48x8/f/face.1 (your directory path may vary) and edit /lib/face/.machines and /lib/face/48x48x8/.dict as appropriate (see faces(1)).
There is a database of faces (picons in their terminology) at Indinana University. This includes the Usenix Face saver project archives, many company logos, and other misc images. http://ftp.cs.indiana.edu/pub/faces/picons/