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How many colors are in your fav-icon and you might want to search for fav-icon IE transparency color.
It looks like 1 color is transparent. Never seen that before, but that would be the only thing I can think of.
Wesley
*EDIT* OR the color gray your using is not websafe or being converted to clear. If you make a new tab in ie so that the background isnt the light blue color (a gray) does the icon still look the same?
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