I have been able to resolve my problem adn want to post what worked for me. Here is the transcript I followed from a similar 2002 issue someone had and posted elsewhere.
Check your settings here: Start/Run/Regedit
If you have Wallpaper listed in the right pane, either change its data value
or delete it.
Also under Local Machine:
To make the change, it can be done here as well:
HKEY_USERS\.DEFAULT\Control Panel\Desktop. In the right pane change to path
My issue is now resolved.
Been having a time cleaning the vicious SpyAxe malware off my computer. I have removed all the DLLs etc so far. Looks like all I have left is my desktop background. It is locked on a "SpyWare Infection" image that is a blue background with a black text box with red and white lettering. Any ideas on how I can get rid of this and restore my ability to put my own pictures etc back in place.