desktop.htt pretty much controls the size and position of your desktop and the wallpaper you have on it, plus it includes a little activeX to allow you to reshape it….. IE7 is a little bit incompatible with the old profile you may have had already.

Since this file is automatically generated by windows, the best fix is to delete the old one[s] and let windows create a new one. To do this open an explorer window and go to tools > folder options > view, and uncheck hide protected opsys files. Apply and ok. Then do a search in your sys drive [usually c: ] for desktop.htt. It will be in Docs and SettingsUserApplication DataMicrosoftInternet Explorer.
Delete them [it, whatever...]. Close the explorer window, rclick your desktop and click Refresh, and then go back and RECHECK that box. you really don’t want those special files exposed all the time!!

have now sorted a fix for this problem

run regedit

find this entry – HKEY_CURRENT_USERSoftwareMicrosoftInternet ExplorerDesktopSafeModeComponents

change the key value – DeskHtmlVersion REG_DWORD 0×00000110(272) to decimal zero

Close regedit log off and log back on.

This has worked for all our XP clients

via DaniWeb IT discussion thread.

Another thing to try is just resizing the screen resolution a few times and then put it back to what it was. That’s what fixed it the last time I came across this problem with Saurubh’s laptop.