Are you sure that you have "Show hidden files and folders" enabled?
Open Explorer, go Tools
> Folder Options...
. Select the View
tab. Select the radio button that says Show hidden files, folders, and drives
. Select Apply
and then select OK
If it really is not there, it sounds like it got deleted somehow. As Budapest
mentioned, what is the direct path? It may be finding Local Settings elsewhere, like in another user account.
In an attempt to bring it back, try going to a website like www.interfacelift.com and select a background picture. Right-click it, select Set as desktop background
. Your background will change, and the Local Settings folder should be recreated. If I remember correctly, Internet Explorer Wallpaper is stored in C:\Documents and Settings\useraccount\Local Settings\Application Data\Microsoft\Internet Explorer\
. If it Local Settings shows up now, that means that it was deleted.
Edited by E-werd, 25 January 2009 - 07:30 PM.