*dons his Pixel Pimp hat* You rang?
There's a few steps to follow in making a good sprite manip.
1. Find a sprite of a character that has at least a similar bodytype as the character you want to turn it into. For example, when I did this one of Brandon's Crimson Storm I nicked a sprite of Psylocke from the Marvel vs. Capcom games, mainly because a) they're both athletic females and b) the outfits were similar enough to save me a lot of work.
Finding the right sprite can be tricky, sadly. The best places to look are MUGEN groups and the like who deal in such things anyway. I honestly have no idea how to rip sprites from an emulated game, but if you ask around about it in MUGEN circles it can help make the search easier.
2. Save the chosen sprite to your hard drive and open it up in whatever paint program you have. I prefer Paint.Net over MSPaint because it's loaded with features and options, one of which is a vastly larger color palette.
3. Now painstakingly alter the colors of the game sprite (REBOOT!) into the colors of the character you want to create. In order to maintain shading I recommend choosing a lighter and a darker color from the primary (eg red in the Crimson Storm sprite above) to match the color variation in the game sprite.
While tools like the Paintcan and paintbrush can save time, more often than not you're going to have to zoom in close and recolor pixels one by one with the pencil tool. It may be tedious, but it'll be worth it.
4. Once the recoloring's done, there's probably stuff you'll want to add or remove to get the character you want: masks, tails, symbols, etc. Just use your best judgement and use the pixel-by-pixel approach to make the alterations.
5. Save that sucker and congrats, yer done 
"Take the Yuan-Ti, bash them with a club made of frozen stupidity, then rip out their sense of subtlety with a rusty spoon, and then you have the Snakes of Mercy Isle" -Taltha Widowfang, drow stalker
Now playing at an MA near you: Dragonslayers #335375
Okay, I know I've asked this before, but this time I might actually try it.
I really like sprites. Not the cartoony ones, but the ones you in Street Fighter and Guilty Gear.
Is there some specific method of making these, or do I just open Paint and draw away?