Finally I managed to get around to wrap my head around a little but really annoying thing that occured to me when upgrading to Vista on my laptop. After upgrading an restoring all my favourite website links on my desktop all the icons reverted to the big blue E which is the icon for IE, at first I thought it was related to the switch to Vista but it seems it's a IE7 related issue as you can read below.
Anyway I'm sure there are still a few more poor suckers like me that still haven't figured it out yet so I thought I share the joy by posting about it...
The reason behind this behavior is the following (you can read more about it here)
Because the shell asks for 48x48 icons, but favicons are 16x16. Stretching them would have looked bad. This decision was made late in the IE7 cycle. Many people have complained and we are considering a fix for a future release.The remedy is really simple just do the following: Right click on your desktop and select the views menu and select classic icons and of you go (the picture below shows the menues in question):
Unfortunately the classic icons are smaller 16x16 and doesn't look that nice but I still prefer to have the customized icon of the site in question so I can find the link fast when looking at my desktop.