While Photoshop doesn't natively support the ICO format, there are are plug-ins available to support saving files to the ICO format. One of them, freely downloadable, is at <
http://www.sibcode.com/icon-plugin/index.htm> and seems to work pretty well from what I can tell. For use with PSCS2, that download provides both ICO and PNG plug-ins but you can ignore the PNG plug-in since CS2 has native PNG support.
Apart from using a plug-in, you can create BMP files that might work as icon files by simply changing the extension to ICO. But, that is less reliable and I suggest a plug-in approach is a better solution.
Regards,
Daryl