Little guide to help people who want to make their own images for LS's main sphere. This guide is based on using Photoshop CS2, but I'm sure if someone uses another setup they can figure it out in a similar manner.
1) Open your image in PS
2) Select the
Elliptical Marquee tool (top-left, usually Square Marquee by default)

3) While holding
Shift (forces it to remain a perfect circle), create a circle big enough for your desired area. Don't worry if it's not over your desired image at this time, just make sure it's big enough. Afterwards, you can fine tune it's position via arrow keys.

4) Press
CTRL+C to copy your selected area
5) Create a new frame following the image below

6)
CTRL+V to paste your image (you may not see anything depending on the image size)
7)
CTRL+T to select free transform. This will create a box around your copied image and a good time to resize the window to see all the edges.

8 ) Drag the
lower right corner back until it aligns with the
bottom right of the main space. It should automatically snap to fit and press
ENTER to apply

9) Now to apply an alpha channel (required). From the top menu,
Select -> Load Selection.... Just press
Enter and it'll select any visible image that's not the background.
10) In your
Channels window, on the bottom select
Create New Channel. This will automatically create an Alpha layer.

11) Using your
Paint Bucket tool, fill your selected area in as
white. This is an important stage not to mess up as this is setting the transparency of your image in game. White = most visible Black = transparent

12)
File -> Save As... and select Targa (.tga) from the format. Name it whatever you want. Make sure
Alpha Channels is selected.

13) Select
32 bit/pixel when prompted
14) Drop your image into your
LunarSphereImports and import as usual
15) CONGRATULATIONS! You've created your first custom art for LunarSphere!
OPTIONAL: You can convert your .tga to .blp using
BLPConverter. Install and follow it's directions to convert. However, this is not necessary as there is no noticeable difference and LS does support .tga
Edit: Grammer FTL