Instructions
Open the "M.U.G.E.N" directory on your computer in the location where you installed the program. The directory is named "mugen" by default.
Open the "work" folder. Open the folder for the character you want to edit. For example, if you want to edit the appearance of the default "M.U.G.E.N." character Kung Fu Man, open the "kfm" folder.
Open your image editing software. The software must be able to edit PNG files.
Open the first image in the character folder in your image editing program.
Alter the image using your software's image editing tools. Save the edited image over the original file.
Continue editing the images in your character's "work" folder. There are potentially hundreds of images you will need to edit to completely change the appearance of the character, so the process takes some time.
Run "M.U.G.E.N." Choose your character. The character will have the updated appearance.