The only major thing I'd suggest changing is the interface. I think you'd be better off trying to improve on the MSIE interface, rather than copying it. Out of all the IE versions, I like the way IE5.x looks the best by far, and IE3 the worst. ;-)

Another quicke - I haven't downloaded it yet, so you may have already covered it, but support for favicon.ico would be a huge plus. IE5.x automatically check the root of the server for that file when you bookmark a page, and if it finds that file, it uses that icon instead of the default on in the favorites list. Pages can also have a meta tag in them directing the browser to an icon file in a location other than root. Not only is that a handy marketing tool for webmasters, but it makes it a lot easier to see what your bookmarks are at a glance. www.robotfarm.de uses one, for example, as does www.pilotonline.com (once I figured it out, I set it up for them while I was working there).

Finally, I think your goal should be to make it fit on a single floppy. That would be a HUGE acheivement. Of course, that may not be possible, so perhaps a split package in addition to the single file download would be handy, as it would make offline distribution significantly easier.

K-Meleon really should support favicons. They make sifting through bookmarks/favorites most convenient, and adding support for them couldn't amount to much more than an extra page of code.