At Herman's request, I have removed the original example. He says it was too out of date. The basic idea was to use CreateIconIndirect and other API functions to create the icon complete with hotspot.

You can download his Icon Editor product at his Web site. It's much more powerful than the original example and lets you edit 16x16, 24x24, 32x32, and 48x48 pixel icons, and static or animated Windows cursors. It has a 30 day/50 run trial period and costs $30 after that.