Adam,
Are you clicking on the Favorite you want to remove in your Zune card or on the entry in the "My Favorites" to the right of the card when you're on your Zune Profile page? I ask as you mentioned just getting the Fav button.
I'm using IE7 and it's working for me. Here's a screen capture of my Profile page showing you my options:
http://bleeman.spaces.live.com/photo...943AFFFD9C!336 (I couldn't figure out how to embed the screen shot)
I've put red arrows on the section I'm talking about and you can see the Remove option just below the entry. It took me awhile to figure out where I was supposed to go to do this too. I kept trying to do it from my Zunecard rather than my Profile.