Ok so I went looking for info on this and couldn't find anything about it. But with only minimal digging in the UDK files I have figured this out.
It has made me happy so I thought I would spread the joy. Maybe you will find it usefull too.
I know you can right click the desktop icon and enter properties and assign an icon that way. But that only applies one on your PC and
does not help the people who install and play your game on there PCs.
If you want your custom icon to be packaged with your game then you have to replace the current UDK icon
Here we go first you need to create your custom icon image useing whatever software you use to create textures (I used photoshop CS4).
Don't go larger 256 by 256 pixels, and save the image in the .ico format.
Now to do that you will need this photoshop plugin here;
If you do Not have photoshop that's cool no worries just save the image as a .png and then use this;
its a fine solution. Point is you just need to get the image into = .ico
save it anywhere you can find it, on yo desktop would be best.
Now that you have your image (no bigger than 256 by 256)
Go here, in your UDK directory / Binaries / InstallData
Open the InstallData, scroll down and find; GameIcon
Thats what you replace with your own.
You need to keep the name the same just replace the image with yours. So if your replacing with your be sure to change the name to GameIcon
Personally I opened it up in photoshop and replaced the image with mine just to keep it simple. (guess i should have had this as step 1)
Anyway there you go done! Now when you package and cook your game it will take that icon with it.
so when you hand your sweet game out to yo friends and they install it they won't be all confused and curious as to what a UDK is.
Hope you found this usefull fell free to ask questions and thank you for reading.