I don't think PS or ImageReady will convert to an .ico file. There are a bunch of icon editors out there like Axialis IconWorkshop or Microangelo. These are more for creating/editing icons but if you just need to convert an image to .ico you can get something like Irfanview which will do the job and is freeware.

Remember that the required size of a shortcut icon is 16x16 pixels as per link below:

http://msdn.microsoft.com/library/default.asp?url=/workshop/Author/dhtml/howto/ShortcutIcon.asp