Originally posted by another user
If you want some advice, use Paint.NET, which natively supports .DDS images. When you save your .DDS, chose "DXT5 (interpolated Alpha)" with "Iterative Fit (Slowest/HQ)". These settings gives you the best quality while keeping the file size exactly the same as the original DDS.
You can also make your theme use the default XMB icons. Just delete the whole "<icon>, </icons>" tags in the XML file of the base theme you're editing!