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You need an image editing program that can save the image in .png format.
The size of the logo should be 128x128 pixels.
Then save it to your My Documents\My Games\GalCiv2\Logos folder, and it should be waiting for you when you begin a new game.

Here is what I have made for my custom race, the Meese.
I used a combination of CorelDRAW! and Corel PhotoPaint to create it.