[entwisi]

are teh backgrounds greyed out or is there something else that stops you selecting them. Also, try opening a picture in a web browser(Try IE) and right click it, try using teh set picture as background.

on teh other PC, do a 'failed logon, reboot, go on as you and then click Start-Run and type eventvwr in teh box, Click OK.

Click teh "system" link and work you way through the messages, you should find something that erroirs giving you details of what it was doing when it failed.