This occurred on a Windows XP system running service pack 2 with Internet Explorer 7 installed.
One of our customers reported that there were a few users that were getting the “Restore My Active Desktop” button appear. When click on it nothing would happen.
In this case the fix was to amend a registry setting called DeskHtmlVersion which can be found in the following path:
All you need to do is change the value of the DeskHtmlVersion REG_DWORD to read 0
After you have made the change you will need to log off then back on again and your desktop should be restored.