Okay. I found the fix
Seems Windows 7 won't refresh custom icons if they are .ico files. The problem was reported for beta and still does not work.
So here is what you do:
Go to Search Programs and type in regedit and then start it up by clicking on it.
Then find this key in your registry:
HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Explorer\CLSID\{645FF040-5081-101B-9F08-00AA002F954E}\DefaultIcon
full=%SystemRoot%\Resources\Themes\bluemoon\full.ico,0
empty=%SystemRoot%\Resources\Themes\bluemoon\void.ico,0
Second, the above key shows a comma and 0 after the example .ico files. Yours won't have the comma and 0 so you must add to make it look like the above values. So click on the reg entry (See picture below) right click it and the select modify. Now add the comma and zero then click Okay and when done exit regedit,
And that will fix the problem.