Now add type, color, or do whatever you'd like to your image. I like to shrink photos (headshots work best) to 32x32 and simply paste them into my Paint document. When you're finished, open the File menu and click Save As. Use the dialog box to choose where you want to save your file, then give it a name followed by ".ico" (without the quotes), and click Save. (The extension ".ico" tells Windows that it's an icon file.) You just created an icon! Now you can change any shortcut or folder to your own icon—just browse to it on your hard drive.
These tips are from the book, Windows XP Killer Tips by Kleber Stephenson, ISBN 073571357X. Published here with the permission of Pearson Education, Inc.