I hate to say it, but until KM releases an updated patch for XP, the only way I know to have both IE7 & 3.54 at once is using a hosts file to connect (e.g. pie patch) & Peer Guardian for fake blocking, there are issues however, PG updates every 2 days by default & daily if set to, this isn't often enough to accurately track the winmxworld blocklist, so it's only partially effective..
At present, best approach is 3.53 using the 9x patch.. I haven't spoken to KM about this, but from reading previous posts, I would expect an IE compatible patch around when IE7 ceases to be beta software, there's no guarantee that microsoft will retain the code that causes the issue in the public release, so writing a patch compatible with the beta might be wasted effort..