I started last night on the new item system that I will have to implement for mod support. It's a bit of a pain but I am also excited to see what the community does with it.
Place your sprite image into the 'items' folder.
Of course I'll have a better documentation of the process once it is time to release it to the public so do not expect to have to follow this guide exactly. Although I still may use it to help visual learners.