Most guitar inlay is done using shell as the inlay material. My only reservation with this stuff is the toxicity of the dust generated when sawing. You absolutely MUST have good dust extraction and be willing to wear a respirator. If you don’t, a rather nasty form of lung cancer may be in your future. And don’t forget about the other people living in your realm.
I use a different approach suggested by furniture makers; epoxy inlay. Here are some step-by-step photos of the simple process.

Start by routing your design with a Dremel and some fine engraving bits.

Next, mix some quick set epoxy with a pinch or two of sawdust. I like to use saw dust that contrasts with the base wood.

After the epoxy has dried, I use a razor blade to scrape off the excess almost level with the surrounding wood.

Then, I sand it flush using 80 grit paper.
otice popped air bubbles and some uneven

At this stage, you may notice some air bubbles and uneven spots.

Before you fill the holes with more epoxy/sawdust, you can use this opportunity to reshape parts of your design.

After filling and sanding the pin holes and other spots, you'll be ready to sand up to 220 grit.

Apply your choice of finish, and you're good to go.
#1 by paul on March 5th, 2010 - 1:20 pm
what a work of art. sick headstock.