It's really easy. It will just take a little bit of your time. IE 5.0 expects the favicon.ico file to reside in the directory of the page being bookmarked. Now, that doesn't give you a lot of freedom, but I'm not complaining. It's a great feature.
Icons generally have to be created using an icon editor.
Your standard image editor probably won't support it. You can find one quite easily at any good software site. For those of you out there that are really motivated, this is a great tool to help you stand out from the crowd. InternetDay is now delivered to more than 150,000 subscribers daily. Reach them cost effectively with your classified here.