This program is blocked by group policy error on Windows 7

Is it a GPO defining a software restriction policy?

Sounds like applocker. Is the application identity service started on the windows 7 machines?

I don't believe so, these are my user configuration policies. I know on the XP machines, they don't allow installing of software, all software has to be isntalled as an administrator, but I don't see what that would have to do changing the background wallpaper.

Administrative Templates
Policy definitions (ADMX files) retrieved from the local machine.Control Panel
Policy Setting Comment
Show only specified Control Panel items Enabled  
List of allowed Control Panel items
desk.cpl
firewall.cpl
mlcfg32.cpl
 
 

Control Panel/Add or Remove Programs
Policy Setting Comment
Hide Add/Remove Windows Components page Enabled  
Hide the "Add a program from CD-ROM or floppy disk" option Enabled  
Hide the "Add programs from Microsoft" option Enabled  
Specify default category for Add New Programs Enabled  
Category: General
 

Control Panel/Display
Policy Setting Comment
Hide Settings tab Enabled  

Control Panel/Personalization
Policy Setting Comment
Enable screen saver Enabled  
Force specific screen saver Enabled  
Screen saver executable name logon.scr
 
Policy Setting Comment
Password protect the screen saver Enabled  
Prevent changing screen saver Enabled  
Screen saver timeout Enabled  
Number of seconds to wait to enable the screen saver
 
Seconds: 1200
 

Desktop
Policy Setting Comment
Do not add shares of recently opened documents to Network Locations Enabled  
Prevent adding, dragging, dropping and closing the Taskbar's toolbars Enabled  
Prohibit User from manually redirecting Profile Folders Enabled  

Microsoft Office XP/Shared paths
Policy Setting Comment
Workgroup templates path Enabled  
Workgroup templates path \\server\Templates
 

Network/Network Connections
Policy Setting Comment
Ability to Enable/Disable a LAN connection Disabled  
Ability to rename LAN connections Disabled  
Ability to rename LAN connections or remote access connections available to all users Enabled  
Prohibit access to properties of a LAN connection Enabled  
Prohibit access to properties of components of a LAN connection Enabled  
Prohibit access to the Advanced Settings item on the Advanced menu Enabled  
Prohibit adding and removing components for a LAN or remote access connection Enabled  
Prohibit TCP/IP advanced configuration Enabled  

Network/Offline Files
Policy Setting Comment
Prevent use of Offline Files folder Enabled  
Prohibit user configuration of Offline Files Enabled  
Prevents users from changing any cache configuration settings.
 
Policy Setting Comment
Remove 'Make Available Offline' Enabled  
Synchronize all offline files before logging off Enabled  

Start Menu and Taskbar
Policy Setting Comment
Add Logoff to the Start Menu Enabled  
Gray unavailable Windows Installer programs Start Menu shortcuts Enabled  
Remove Balloon Tips on Start Menu items Enabled  
Remove links and access to Windows Update Enabled  
Remove Network Connections from Start Menu Enabled  

System
Policy Setting Comment
Don't display the Getting Started welcome screen at logon Enabled  
Don't run specified Windows applications Disabled  
Prevent access to registry editing tools Disabled  

System/Scripts
Policy Setting Comment
Run logon scripts synchronously Enabled  

System/User Profiles
Policy Setting Comment
Limit profile size Disabled  

Windows Components/AutoPlay Policies
Policy Setting Comment
Turn off Autoplay Enabled  
Turn off Autoplay on: CD-ROM and removable media drives
 

Windows Components/Internet Explorer
Policy Setting Comment
Disable changing Advanced page settings Enabled  
Disable changing certificate settings Enabled  
Disable changing default browser check Enabled  
Disable changing home page settings Enabled  
Home Page  
 
Policy Setting Comment
Disable changing ratings settings Enabled  
Disable changing Temporary Internet files settings Enabled  
Disable external branding of Internet Explorer Enabled  
Disable the Reset Web Settings feature Enabled  
Identity Manager: Prevent users from using Identities Enabled  
Search: Disable Search Customization Enabled  
Use Automatic Detection for dial-up connections Enabled  

Windows Components/Internet Explorer/Browser menus
Policy Setting Comment
Help menu: Remove 'For Netscape Users' menu option Enabled  
Help menu: Remove 'Send Feedback' menu option Enabled  
Help menu: Remove 'Tip of the Day' menu option Enabled  
Help menu: Remove 'Tour' menu option Enabled  

Windows Components/Internet Explorer/Delete Browsing History
Policy Setting Comment
Disable "Configuring History" Enabled  
Days to keep pages in History  
 

Windows Components/Internet Explorer/Internet Control Panel/Security Page
Policy Setting Comment
Intranet Sites: Include all network paths (UNCs) Enabled  

Windows Components/Microsoft Management Console
Policy Setting Comment
Restrict the user from entering author mode Enabled  
Restrict users to the explicitly permitted list of snap-ins Enabled  

Windows Components/Task Scheduler
Policy Setting Comment
Hide Advanced Properties Checkbox in Add Scheduled Task Wizard Enabled  
Hide Property Pages Enabled  
Prevent Task Run or End Enabled  
Prohibit Browse Enabled  
Prohibit Drag-and-Drop Enabled  
Prohibit New Task Creation Enabled  
Prohibit Task Deletion Enabled  

Windows Components/Windows Explorer
Policy Setting Comment
Allow only per user or approved shell extensions Enabled  
Do not request alternate credentials Enabled  
Hides the Manage item on the Windows Explorer context menu Enabled  
No Entire Network in Network Locations Enabled  
Remove Hardware tab Enabled  

Windows Components/Windows Installer
Policy Setting Comment
Prevent removable media source for any install Enabled  

Windows Components/Windows Media Player/Networking
Policy Setting Comment
Streaming Media Protocols Disabled

Application Identity service is Stopped and set to Manual on these PCs.