>I installed my app on a new user today from a netsetup (win95). First, I noticed the Setup.exe was a DOS icon. The setup ran okay, but my icon placed on desktop was also DOS icon, and cannot be changed to the custom icon. Then I noticed in many other windows applications the .EXEs are also DOS icons in Windows Explorer on the machine.
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>Does anyone know how to correct this? I am looking in File Types, extensions, but have not found the right place yet, if it's there.

Go download and install tweakui. It's a microsoft control panel, unsupported in win95, but works very well. It has an option to repair icons. You can get it from download.com.