What are Icon files and why they are important?  Icon files are little logos or symbols branding your site.  They come in handy two ways:

The growing popularity of convenient tabbed Internet browsing.  You can see in the example below.  On the tabs, it is easy to spot the site's logo without reading the tab:

When browsing trough your favorites, .ico's make your favorite sites pop out.  Look at the example of my favorites: