Did the 'bliss' wall apply?

If not, is there a wall named "Desktop" at the bottom of the background list under "Display Properties\Desktop tab"?

Okay,

Look in the registry (Start > Run > type: regedit > press "Enter") and in the left-hand pane, expand the folders (keys) to the following:

"HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies"

Expand the "Policies" folder (key) and see if there is a "System" folder (key).

If so, highlight that key and see if there is an entry in the right-hand pane that has a value (Data) of "C:\Windows\Web\Wallpaper\Desktop.html".

If there is an entry with that value (Data), right-click the name of that entry (right-most column in the right-hand pane of the registry editor), and then select "Delete".

Note - before editing this right click the "System" folder (key) in the left-hand pane > select "Export" > in the Export dialog, give the file a name ("Before.reg" or similar) > save to say "My Documents". This file can be double-clicked to restore that key if needed.

Your easiest fix may be to download and run this http://www.kellys-korner-xp.com/regs_edits/wallpaperenable.reg

The above file link is from "kelly's Korner" and is a registry file which enables wallpaper changing (all support image files).

A couple of manual checks you can do in the registry are:

1 - Run a search for "desktop.html" in the registry (Edit > Find) using the default search selections.

Note - you can hit "F3" to find the next instance.

2 - Look under the following keys in the left-hand pane of the registry editor for an "ActiveDesktop" key:

"HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies"

"HKEY_LOCAL_MACHINE\Software\Microsoft\Windows\CurrentVersion\Policies"

Highlight any "ActiveDesktop" key in the left-hand pane and look for a key that has "Wallpaper" in the name. Usually it will be a key allowing a specific type of wallpaper. Depending on the entry, you will want to set the value (Data) to either "0" (disabled), or "1" enabled. Note - the ones I have seen should be set to "0" (disabled).

Again, your best bet may be to use the file link from Kelly's, as this will reset the appropriate registry keys to enable wallpaper changing in the registry.

As always, backup the registry before any editing.   

I forgot to list the keys created by that downloaded file:

[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies\ActiveDesktop]
"NoChangingWallPaper"=dword:00000000
"NoAddingComponents"=dword:00000000
"NoComponents"=dword:00000000
"NoDeletingComponents"=dword:00000000
"NoEditingComponents"=dword:00000000
"NoCloseDragDropBands"=dword:00000000
"NoMovingBands"=dword:00000000
"NoHTMLWallPaper"=dword:00000000

[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies\System]
"NoDispBackgroundPage"=dword:00000000

[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies\System]
"NoDispScrSavPage"=dword:00000000

[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies\Explorer]
"NoActiveDesktopChanges"=hex:00,00,00,00
"NoActiveDesktop"=dword:00000000

[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies\System]
"NoDispCPL"=dword:00000000

[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies\Explorer]
"NoSaveSettings"=dword:00000000

[HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies\Explorer]
"ClassicShell"=dword:00000000

You can remove those keys (from the right-hand pane) if you wish, before attempting any system restore.

If you do not use Active Desktop, you can actually delete that complete folder (key) from the left-hand pane.

This is starting to sound like WindowBlinds may be preventing the change.

How about this:

1 - Open WB config panel and go to Basic Settings and select the "Apply any wallpaper included" option.

2 - Go into "Wallpaper" section and click the little tools button to bring up the location dialog and deselect all but the WindowBlinds directory option.

3 - Apply a skin that has a wall included.

4 - Reboot the computer and then unload WindowBlinds via the system tray icon context menu.

5 - Try applying the default Windows XP theme via Display Properties\Themes tab\Theme drop-down list.

If successful, does the Bliss wall apply this time?