Ran into this issue due to using the windows ieak toolkit for Internet Explorer 7/8 to compile a custom exe. Well everything initially tested okay and after deployment we noticed that IE7 and IE8 was not operational anymore. They would get a internal webpage but nothing else like the settings are being blocked from group policy, well sort of……
I found that when creating the custom exe from the ieak toolkit it left in some options that actually were the cause. look in C:\Program Files\Internet Explorer\CUSTOM\
There was a file in there called install.ins and when you open the file you will see the last line was the whole problem…. What we did was compile a runas program that will just delete this file off of all workstations instead of worrying about the contents of the file. Once the file has been removed group policy for internet explorer works just fine. If you want to keep the install.ins file then remove everything below proxy including the line that says proxy.
[Branding]
Type=2
Wizard_Version=6.0.5730.13
Custom_Key=
Language Locale=EN
Language ID=1033
NoBrowserDefault=0
AutoUpdate=0
NoBackup=0
Silent Install=0
StealthInstall=1
RestartOption=1
NoSearchGuide=1
FavoritesOnTop=0
NoFavorites=1
NoLinks=1
NoRSSFeeds=1
CMProfilePath=
CMProfileName=
CMUseCustom=0
Platform=1
[Media]
Build_CD=0
Build_LAN=1
Build_BrandingOnly=0
[IEAKLite]
Sign-up Settings=1
Certificate Customization=1
[CDCustomFiles]
InstallIEVersion=7,0,5730,13
[SearchProviders]
URL1=http://www.google.com/search?q={searchTerms}&sourceid=ie7&rls=com.microsoft:{language}:{referrer:source}&ie={inputEncoding?}&oe={outputEncoding?}
SortIndex1=1
Default1=1
DisplayName1=Google
[URL]
Home_Page=http://www.msn.com
MergePreviousHomePages=0
NoWelcome=1
AutoDetect=1
AutoConfig=0
[Proxy]
HTTP_Proxy_Server=
FTP_Proxy_Server=
Gopher_Proxy_Server=
Secure_Proxy_Server=
Socks_Proxy_Server=
Use_Same_Proxy=1
Proxy_Enable=0
Proxy_Override=<local>
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