This is a bug/problem with Internet Explorer, not rendering an icon correctly. To get your icon to work, use an existing icon and paste your new icon into it (which should keep the same color pallette), and then save your new icon. Internet Explorer seems to choose whatever Icon image size it wants, when displaying an icon file. So if you get a 16x16 icon in the Message Window it means that Internet Explorer has chosen to use it, this is unfortuantely out of our control. *Note: This has been fixed for builds >= 846, as we have dropped the .ico file format, and used .gif instead.
This problem has been found to be the default 16 colour driver that comes with windows 98. We have been able to reproduce this on a machine that didn't have the correct up to date drivers installed. To fix, install the latest drivers for your video card, and use 16bit or 32bit colours.