Favicons are the little icons you see associated with a website in your browser tabs or bookmarks. See Favicon - Wikipedia, the free encyclopedia to get some background on a favicon if you don't know what it is. Here's how I created a favicon:
I borrowed Oranges on Flickr - Photo Sharing!, which I found in the Creative Commons Search engine. I looked for pictures of oranges that I could reuse for commercial purposes.
I applied a PaintShop Pro Circle filter to get Oranges for remixing on Flickr - Photo Sharing!.
I then generated favicon.ico using FavIcon from Pics to go from a jpg to ico.
I'm using the Digital Ramble » Favicon Manager WordPress Plugin to tell my WordPress blogs about favicon.ico.