This works for IE only. You need to create an icon called "favicon.ico", this image (13x13) is then added next to web address when someone adds your site to their favorites. You also need to add inbetween your head tags
<link rel="shortcut icon" href="http://www.YOURSITE.com/favicon.ico">
I find that IE opened in the later versions of Windows ME, XP, etc., do not allow this, unless you open IE using the blue "Explorer" icon. Why? I have no idea.
It's sounds like your using Windows File Explorer with is not technicly IE, but can use IE's browsing features.
When you use the "blue explorer" icon, your actually opening IE and that's why it works.