Draw a design on paper, and decide the layout, veneers, and other design choices in advance. Select a pattern in keeping with the instrument. An old banjo, for example, will warrant a different pattern than a vintage rock guitar.
Inlays with a small, intricate design in a piece of wood, such as a guitar headstock, are often surrounded by veneer over solid wood. As an example, consider the warmth, beauty, and visual interest of a walnut veneer with "tiger maple" flame sycamore for the body.
Cut the paper drawing of the design with a hobby knife. Affix it to the surface of a mother-of-pearl blank with epoxy or super glue.
Wear a dust mask and goggles, as silicon dust from the work can cause serious health risks, including lung disease. If you grind pearl blanks, wear an OSHA approved respirator.
You'll need a jeweler's saw, a cutting jig, a stiff scribe, a few needle and small mill files, a Dremel Moto-tool with a Dremel router base, various bits and appropriate collets for the Dremel, a vise to hold the object to be inlaid, and a rubber sanding block. For lighting, use a swing-arm lamp. Use several sizes of blades for the saw.
Cut the design in the blank. Thicker widths of pearl are best for novices, since they do not break as easily. However, thicker pearl blanks are hard on saw blades. Plan for blade damage and buy extras.
Crazy-glue the pearl to the work piece where it will be inlaid. Trace around it with a fine scribe. Cut deep into the inlay mortise with the Dremel tool on a mini-router base. Drip a small amount of acetone into the cuts, but don't get acetone on the finish. After 30 minutes, carefully dislodge the wood inlay.
Cut the inlay outline deeply with the pointed dental bit. Cut downward and sideways inside the line. Use the router bit to remove as much of the inlay mortise wood as possible. Do not encroach the edge, because the bit can do irreparable damage. Undercut the edges of the mortises. Cutting mortises can take hours for each one.
Slip the pearl into place. If there is any difficulty in placing the pearl into the wood, lift the pearl out and re-work the mortise.
Glue the inlay in place with epoxy, then file and sand it flush. If there are any gaps, apply a clear or tinted water-based grain filler or pack matching sawdust around the inlay and soak the sawdust with super glue. There should be no visible glue lines. Spray several coats of finish over the top to seal it.