Using photoshop to create & edit ICO files

To edit & create icons in Photoshop you need an ICO plugin: http://www.telegraphics.com.au/sw/info/icoformat.html

After installing the plugin file in the Photoshop directory (installing means just copy the ICOFormat.8bi file into the Photoshop plugin directory so it can load it at startup; mine is: C:\Program Files\Adobe\Adobe Photoshop CS\Plug-Ins\File Formats\ICOFormat.8bi)

to create an icon in Photoshop:
1. select your object which you want to appear in your icon with the Magic Wand tool (selection).
you might want to adjust the Tolerance factor.

2. go to Selection menu and choose save selection and name the layer Alpha (it can have any name).

3. go to Save menu and now you should have in the list the ICO format available.

Remeber 2 things:
The alpha channel you created must look like this: you should see the object silhouette in black and the background in white.
The icon cannot have in size more than 255x255 pixels (Windows file format limitation).

At the same location (http://www.telegraphics.com.au) there is a tool which can take different icons files and concatenates them into one ico file but i havent tried it.