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 control 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 Settings\User\Application Data\Microsoft\Internet 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!!

There should only be one desktop.htt in each user's Application Data\Microsoft\Internet Explorer folder. Delete it, because it will be regenerated. And restart; log off/on should work also... other users may have to do the same with their file.