Greenfish Icon Editor Pro (aka GFIE Pro) is a powerful open source icon, cursor, animation, icon library and image editor. It can be used to create Vista compatible icons up to 256×256. It has a variety of drawing tools and filters. It can open/save ICO, PNG, CUR, BMP, BMP, GIF, JPEG, ANI files and animated cursors.
A tutorial for converting pictures to icons can be found on Instructables.