I was giving a presentation the other night on the new features of SharePoint 2007 and COULD NOT find the settings for the Recycle Bin. While I had screenshots, they just aren't the same. I realized on the ride home that the Recyle Bin is a function of a Web Application, not a Site Collection. The Recycle Bin settings are found at http://CentralAdminHost:12345/_admin/vsgeneralsettings.aspx; verify you have the correct web application open in the drop-down.
So, while I am already on this topic, I will share my real-world experience thus far with the OSS2007 Recycle Bin.
This recycle bin has two stages - User Stage and Site Administrator(s) Stage. When a user deletes a file, it is moved to the first stage of the recycle bin (appears to be a hidden doc lib, not sure). The user then has 2 options upon entering the recycle bin - 1. Restore 2. Delete. I really wish they hadn't put these right next to each other :-(
The first stage will count against the site quota, while the second stage will not. It appears that if you go over the first stage quota , it begins overwriting the first file in the bin.
If you have very large sites, I recommend using less than the 50% default, since it can be difficult to manage your storage on a daily basis otherwise.
One more tip: If you disable the recycle bin and Apply changes, it will empty ALL recycle bins in the web app. Very nice if you have an immediate storage issue, very dangerous otherwise.
-ben