Remove the bad IE icon from desktop, either delete or right click desktop -> Properties->Desktop->customize desktop-> uncheck Internet Explorer
Go to http://www.kellys-korner-xp.com/regs_edits/ie_fix.reg – Restore IE Desktop Shortcut Icon Functions
Download that.
Open registry, go to HKEY_CLASSES_ROOT\CLSID\{871C5380-42A0-1069-A2EA-08002B30309D}
Delete that key {871C5380-42A0-1069-A2EA-08002B30309D} + all sub keys
Go to HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Explorer\CLSID\{871C5380-42A0-1069-A2EA-08002B30309D}
Delete that key {871C5380-42A0-1069-A2EA-08002B30309D} + all sub keys
Merge that registry script into registry.
Last, right click desktop -> Properties->Desktop->customize desktop-> check Internet Explorer hit ok, and ok
Should be all set