Here's an easy way to create a favicon for your site.  Just download this zip and alter the favicon.png file with your graphics editor.  Then run png2ico.bat and you'll have a favicon.ico file in the same directory.

The batch file simply runs this command:

png2ico favicon.ico favicon.png

Be sure and visit the author's site.

Here's the favicon code for your website head:

<link rel="shortcut icon" href="http://www.domain.com/favicon.ico">