Can't change desktop's background

When I try to change the desktop's background the Browse option  and the Theme folder are not available to use.

Here is the Hijakthis log:

Logfile of Trend Micro HijackThis v2.0.2
Scan saved at 5:32:34 PM, on 5/12/2008
Platform: Windows XP SP3 (WinNT 5.01.2600)
MSIE: Internet Explorer v7.00 (7.00.6000.16640)
Boot mode: Normal

Running processes:
C:\WINDOWS\System32\smss.exe
C:\WINDOWS\system32\csrss.exe
C:\WINDOWS\system32\winlogon.exe
C:\WINDOWS\system32\services.exe
C:\WINDOWS\system32\lsass.exe
C:\WINDOWS\system32\svchost.exe
C:\WINDOWS\system32\svchost.exe
C:\WINDOWS\System32\svchost.exe
C:\WINDOWS\System32\svchost.exe
C:\WINDOWS\System32\svchost.exe
C:\WINDOWS\system32\LEXBCES.EXE
C:\WINDOWS\system32\LEXPPS.EXE
C:\WINDOWS\system32\spoolsv.exe
C:\WINDOWS\Explorer.EXE
C:\WINDOWS\system32\svchost.exe
C:\WINDOWS\system32\cisvc.exe
C:\WINDOWS\system32\cache\dllhost.exe
C:\WINDOWS\system32\svchost.exe
c:\windows\system32\cache\spoolsvr.exe
C:\WINDOWS\wllv.exe
C:\WINDOWS\System32\svchost.exe
C:\WINDOWS\System32\svchost.exe
C:\Program Files\Spyware Doctor\pctsAuxs.exe
C:\Program Files\Spyware Doctor\pctsSvc.exe
C:\WINDOWS\System32\svchost.exe
C:\Program Files\Spyware Doctor\pctsTray.exe
C:\WINDOWS\System32\wdfmgr.exe
C:\WINDOWS\restore\host\explorer.exe
C:\WINDOWS\system32\ctfmon.exe
C:\WINDOWS\system32\wuauclt.exe
C:\Program Files\iPod\bin\iPodService.exe
C:\PROGRA~1\AVG\AVG8\avgwdsvc.exe
C:\PROGRA~1\AVG\AVG8\avgrsx.exe
C:\Program Files\AVG\AVG8\avgtray.exe
C:\WINDOWS\System32\msiexec.exe
C:\Program Files\Trend Micro\HijackThis\HijackThis.exe
C:\WINDOWS\System32\wbem\wmiprvse.exe

R1 - HKCU\Software\Microsoft\Internet Explorer\Main,Default_Page_URL = http://www.dellnet.com
R1 - HKLM\Software\Microsoft\Internet Explorer\Main,Default_Page_URL = http://go.microsoft.com/fwlink/?LinkId=69157
R1 - HKLM\Software\Microsoft\Internet Explorer\Main,Default_Search_URL = http://go.microsoft.com/fwlink/?LinkId=54896
R1 - HKLM\Software\Microsoft\Internet Explorer\Main,Search Page = http://go.microsoft.com/fwlink/?LinkId=54896
R0 - HKLM\Software\Microsoft\Internet Explorer\Main,Start Page = http://go.microsoft.com/fwlink/?LinkId=69157
R0 - HKCU\Software\Microsoft\Internet Explorer\Main,Local Page =
R0 - HKLM\Software\Microsoft\Internet Explorer\Main,Local Page =
R1 - HKCU\Software\Microsoft\Internet Connection Wizard,ShellNext = http://go.microsoft.com/fwlink/?LinkId=3502
F2 - REG:system.ini: UserInit=C:\WINDOWS\system32\userinit.exe,C:\WINDOWS\system32\mbti.exe
O2 - BHO: BHelper Objects - {0BD8D6AE-A0BE-4CD2-9A7D-E440E33C3227} - (no file)
O2 - BHO: WormRadar.com IESiteBlocker.NavFilter - {3CA2F312-6F6E-4B53-A66E-4E65E497C8C0} - C:\Program Files\AVG\AVG8\avgssie.dll
O2 - BHO: AVG Security Toolbar - {A057A204-BACC-4D26-9990-79A187E2698E} - C:\PROGRA~1\AVG\AVG8\AVGTOO~1.DLL
O3 - Toolbar: (no name) - {BA52B914-B692-46c4-B683-905236F6F655} - (no file)
O3 - Toolbar: AVG Security Toolbar - {A057A204-BACC-4D26-9990-79A187E2698E} - C:\PROGRA~1\AVG\AVG8\AVGTOO~1.DLL
O4 - HKLM\..\Run: [ISTray] "C:\Program Files\Spyware Doctor\pctsTray.exe"
O4 - HKLM\..\Run: [AVG8_TRAY] C:\PROGRA~1\AVG\AVG8\avgtray.exe
O4 - HKCU\..\Run: [ctfmon.exe] C:\WINDOWS\system32\ctfmon.exe
O4 - HKUS\S-1-5-18\..\RunOnce: [RunNarrator] Narrator.exe (User 'SYSTEM')
O4 - HKUS\.DEFAULT\..\RunOnce: [RunNarrator] Narrator.exe (User 'Default user')
O8 - Extra context menu item: Add to Google Photos Screensa&ver - res://C:\WINDOWS\system32\GPhotos.scr/200
O8 - Extra context menu item: LimeShop Preferences - file://C:\Program Files\LimeShop\System\Temp\limeshop_script0.htm
O9 - Extra button: Locators.com Search Bar - {A26ABCF0-1C8F-46e7-A67C-0489DC21B9CC} - (no file)
O9 - Extra 'Tools' menuitem: Locators.com Search Bar - {A26ABCF0-1C8F-46e7-A67C-0489DC21B9CC} - (no file)
O9 - Extra button: Real.com - {CD67F990-D8E9-11d2-98FE-00C0F0318AFE} - C:\WINDOWS\System32\Shdocvw.dll
O9 - Extra button: (no name) - {e2e2dd38-d088-4134-82b7-f2ba38496583} - C:\WINDOWS\Network Diagnostic\xpnetdiag.exe
O9 - Extra 'Tools' menuitem: @xpsp3res.dll,-20001 - {e2e2dd38-d088-4134-82b7-f2ba38496583} - C:\WINDOWS\Network Diagnostic\xpnetdiag.exe
O9 - Extra button: Messenger - {FB5F1910-F110-11d2-BB9E-00C04F795683} - C:\Program Files\Messenger\msmsgs.exe
O9 - Extra 'Tools' menuitem: Windows Messenger - {FB5F1910-F110-11d2-BB9E-00C04F795683} - C:\Program Files\Messenger\msmsgs.exe
O16 - DPF: {30528230-99F7-4BB4-88D8-FA1D4F56A2AB} (YInstStarter Class) - http://us.dl1.yimg.com/download.yahoo.com/dl/installs/yinst0401.cab
O16 - DPF: {6414512B-B978-451D-A0D8-FCFDF33E833C} (WUWebControl Class) - http://www.update.microsoft.com/windowsupdate/v6/V5Controls/en/x86/client/wuweb_site.cab?1209923541031
O16 - DPF: {6E32070A-766D-4EE6-879C-DC1FA91D2FC3} (MUWebControl Class) - http://www.update.microsoft.com/microsoftupdate/v6/V5Controls/en/x86/client/muweb_site.cab?1210600495117
O16 - DPF: {77E32299-629F-43C6-AB77-6A1E6D7663F6} - http://www.nick.com/common/groove/gx/GrooveAX27.cab
O18 - Protocol: linkscanner - {F274614C-63F8-47D5-A4D1-FBDDE494F8D1} - C:\Program Files\AVG\AVG8\avgpp.dll
O20 - AppInit_DLLs: avgrsstx.dll
O20 - Winlogon Notify: ddcyaby - ddcyaby.dll (file missing)
O20 - Winlogon Notify: __c001742B - C:\WINDOWS\
O20 - Winlogon Notify: __c007A024 - C:\WINDOWS\
O20 - Winlogon Notify: __c00FAF49 - C:\WINDOWS\
O23 - Service: Windows Driver (AppToService_Windows Driver) - Basta Computing  - C:\WINDOWS\system32\app2service.exe
O23 - Service: AVG8 WatchDog (avg8wd) - AVG Technologies CZ, s.r.o. - C:\PROGRA~1\AVG\AVG8\avgwdsvc.exe
O23 - Service: Help and Support Center (helpsvcc) - Unknown owner - C:\WINDOWS\system32\cache\dllhost.exe
O23 - Service: Internet Application Migration (IAM) (iamsvc) - Intel Corporation - (no file)
O23 - Service: InstallDriver Table Manager (IDriverT) - Macrovision Corporation - C:\Program Files\Common Files\InstallShield\Driver\11\Intel 32\IDriverT.exe
O23 - Service: iPod Service - Apple Computer, Inc. - C:\Program Files\iPod\bin\iPodService.exe
O23 - Service: LexBce Server (LexBceS) - Lexmark International, Inc. - C:\WINDOWS\system32\LEXBCES.EXE
O23 - Service: MsSecurity (MsSecurity1.203.2) - Unknown owner - C:\WINDOWS\wllv.exe
O23 - Service: PC Tools Auxiliary Service (sdAuxService) - PC Tools - C:\Program Files\Spyware Doctor\pctsAuxs.exe
O23 - Service: PC Tools Security Service (sdCoreService) - PC Tools - C:\Program Files\Spyware Doctor\pctsSvc.exe
O23 - Service: Application that interactively manages NT services (svcmngr) - Unknown owner - C:\WINDOWS\config\config.exe
O23 - Service: Universal Serial Bus Control Control (UniSerialControlCNT) - Unknown owner - C:\WINDOWS\restore\host\explorer.exe

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