There’s an excellent tutorial over at Matt Mullenweg’s site detailing how to create a favicon. It’s easy as pie; you can see I’ve now got an annoying little favicon for this site using the (hopefully now very familiar, burned into your brain, branded into your very essence) red “W” and turquoise “J” from WebJones.

And here’s an interesting look at different sites’ own favicons and a link to a great review by Makiko Itoh.