A friend of mine was recently unable to change his Desktop wallpaper. The problem turned out to be that accessibility settings got changed. He has no idea how this happened. But if you can't change your wallpaper in Vista, you might want to check this to see if the same thing has happened to you.

Open the control panel and then go to Ease of Access Center > Make the computer easier to see. You'll see an entry called Remove background images (where available). Make sure the box next to this is not checked. If it is checked, uncheck it and save your changes. You should then be able to set your desktop wallpaper without any issues.