Ok, I figured it out.
Make your custom face from one of the armaii templates (where it has two hands and no legs/feet).
Then export it as a 256x256 jpg.
Load up texview2 which is a free tool provided by BIS that you can find on their wiki.http://community.bistudio.com/wiki/TexView_2
Then import your face.jpg and export it as a face.paa file. Make sure it is under 100kb. You can actually use 1024x1024 or 512x512 as a texture format but when you export those sizes they are over 100kb and 99.9% of the servers only allow 100kb custom faces.
Take that file and place it in your documents/arma2 directory.
Load up the game and select your custom face.
The .paa file fixes the ATI graphics bug where your custom face is about 500% too bright.