Well, I don't know what caused your problem, but the symptoms are exactly like what I experienced when I overclocked my card beyond its capabilites with increased voltage through bios: The windows booted fine and the background picture was ok, but the icons and specially the text below each icon was totally messed up. I have dual boot (xp and vista) and the problem persisted in vista as well, so it wasn't driver-related. I would say it's most likely your card. It's a faulty one.
By any chance, do you see a few random colorful pixels here or there? If yes, it's definitely your card.