I am having the same thing on my website:
I have a 32 x 32 favicon.ico in the root (www.plastic.org/favicon.ico). I also tried adding the link tags, and have tried several versions without success. My IE7 shows other sites' favicons (including channel 9) in the address bar. I have also tried turning off IE add-ons, and have tried deleting my temporary internet files
I get the favicon saved when I save the site as a favorite in IE6 (that is true even the main site, at www.plastic.org, which doesn't have any link tags). However, with IE7 I neither get the favicon saved with a favorite nor get the favicon in the address bar.
Your favicon displays fine in IE7 here:
I too can see the sites icon in IE7.