Cannot Change Windows 7 / Windows 2008 Server Desktop Background from a Solid Color to a Picture

This can happen if the TranscodedWallpaper file is damanged or corrupted.  Here's how to fix it:

1- Highlight and copy (ctrl-c) this path exactly: %AppData%\Microsoft\Windows\Themes\

2- Click Start, then paste it into your Search box and hit enter.  In the window that opens, delete the TranscodedWallpaper.jpg file.  Then you should be able to set wallpaper normally again.