If you use ie5+ regularly you've probably noticed that when you add certain sites to your Favorites a custom icon appears in several places. The question of how to do this comes up quite frequently in the Usenet group alt.html. I have made some brief notes about favicon.ico below.
While introduced by ie5 the favicon.ico is moreless universally supported now though there may be some variation on just where the icon is used by the various browsers. Mozilla official release notes explain the current level of support and a number of open source browsers are based on the Mozilla software (including Firefox).
Briefly, favicon.ico is a 16x16 pixel graphic which is placed in the root directory of your website. In ie5 (not sure about newer versions) this is a special image format, the graphic must be in icon (.ico) format. Mozilla, beginning with version 0.9.6, supports various image formats for the page icon including PNG.
Several sites that discuss this topic:
I use a favicon.ico here at Rock13.com.