I use an old version of Adobe Photoshop, but any image editing program that retains resolution will work. You need to start on the image at large size, say 2 inches x 4 inches, and high resolution (600dpi). Then, when you resize down it to around 1/8" x 1/4", the program keeps as much detail as possible. I go with 600 dpi because that's as good as my inkjet printer can print. And I just use sticker paper (I'm cheap).
For sweet results, get a waterslide decal kit from a hobby store and print on that. Trim it close and apply like model decals. It's as close to the real thing as you can get.