The "modified theme" is set if the Bliss wallpaper does not apply with the default blue "Luna" theme.
I am running out of ideas that would not be experiments at this point.
I would say you have a few options:
1 - Unload WB > uninstall WB > reboot > delete any leftover WindowBlinds folder in the Program Files directory > see if you can apply a wallpaper. If this fails, reinstall WindowBlinds (you will be no worse off) and see if this somehow clears the issue.
2 - Wait for someone like "Neil Banfield" to drop by who is a WB developer. He should be able to rule out (or identify) an issue with WB. I would be surprised if WB is the faulty party, but it may be so.
3 - Go to a site like Major Geeks, or similar, where you can download and post a "Hijack this" report to identify any possible issues that slipped by your security software.
4 - Search via Google for "Can't apply wallpaper" or similar, to see what other solutions are available.
5 - Hope 'yraq' drops by and helps. He is far more advanced in troubleshooting this stuff than I am.
Sorry I could not help you sort it. 
