Ok since most of the posts on this are old (and no longer really apply due to windows 7/or dont give all the required information) i thought i would rewrite this:
First you will need 3 things - (All are free)
Photoshop trial version (or a full version of course) ----------------------- http://tryit.adobe.com/au/cs5/photoshop/?sdid=FIKWE&
Paint.Net v3.5.6 or newer ---------------- http://www.getpaint.net/
Base icons (made by me, yes its not great but feel free to change/manipulate it to your hearts desire) -------
http://www.mediafire.com/?gn0p5wa87p9nll6
http://www.mediafire.com/?xlr3cwqfuturwa5
http://www.mediafire.com/?r7544h4g1pfy11k
Ok so first open up the stock image you desire in photoshop.
Add a new layer and on this layer add the icon that you want.
Upon finishing the icon make sure that you "merge visible" and not "Flatten Image"
Save as .png file
Open .png file in paint.net
save file as .dds
Link into your mod
Hope this is useful to everyone wanting to make new icons
Exx