I've been using this software for a couple of years now and it is hand's down, THE best icon editing and creation software I've ever used. The pitiful built-in Visual Studio 2005/2008 editor just doesn't cut it. The program is called Axalis IconWorkshop. Here's a link:

http://www.axialis.com/iconworkshop/

The current price for the Personal Edition is: $49.45

The Professional Edition is: $69.95

There is also a free version called IconWorkshop Lite. It can be downloaded here:

http://www.axialis.com/download/iwlite.html

The big differences in the Professional Edition is that you are able to edit Image List Bitmaps (very useful if you do any Windows Forms/MFC programming) and there also quite a few "batch" features to speed up large icon projects.

A couple of the best features include:

• You can build the nice High-Resolution Vista-compatible icons (Even PNG format is supported)
• Supports Windows and Mac OS icons
• Comes with a free plug-in for Visual Studio 2008 so you can edit icons inline within your IDE
• Makes it easy to create 16x16, 32x32, 48x48, etc. packaged icon files. In other words, all these formats can be in 1 .ico file.

One of my favorite features is how easy it is to add a dithered transparency around an image icon. Literally all you have to do is copy and paste your image into the editor, then click on the transparency tool and click on the color region you want to go transparent. It does all the work of feathering the transparency so you don't have jagged edges, etc. Here's a screen of what the application looks like:

Just recently, the Visual Studio C++ blog recommended this software as the favorite icon editing program internally at Microsoft. In fact, some of the icons for Vista were created and managed with this program. Here's their post:

http://blogs.msdn.com/vcblog/archive/2008/08/11/iconworkshop-lite-now-available-for-download.aspx