Starting Windows Vista, Windows supports icon files with 256x256 images. However, free tools were not built with that compatibility. You can use this tool to create gorgeous icons for your applications. Simple create the images with the editor of your choice (paint.net or photoshop), save them as png files (save with transparency). Use this program to stitch them into an .ico file and you're good to go.
This program and its source code is licensed under the BSD 2-Clause license.
Last updated sometime in 2006.