I don't really know how to solve it, but from what I've read this was/is caused by a virus.
I googled what you describe and I found this though
"That worked! As Anonymous recommended, I deleted the "Debugger" registry key from the entry for Explorer, rebooted, and my desktop is now back."
entire fix post:
"This issue is usually related to a virus infection. What happened to a client of mine was as follows:
- System gets infected by virus
- Antivirus software is installed, including updates
- Antivirus software runs, cleans out several infected files
- At next boot, Windows shell does not run
- When in Task Manager (started by pressing CTRL-ALT-DEL), when choosing File, Run and entering explorer.exe, error message "Windows cannot find explorer.exe".
- If you open a DOS prompt and browse to C:\WINDOWS and do DIR EX*., explorer.exe shows up. You can rename the file, delete the file, etc.; the file is clearly there.
- If you try to replace explorer.exe with a copy from a Windows installation CD, you still get "Windows cannot find explorer.exe"
The registry entry HKLM/Software/Microsoft/Windows NT/Current Version/Image File Execution Options/explorer.exe has a key similar to "Debugger" with value similar to "C:\Windows\Infected.exe".
The antivirus software has successfully removed Infected.exe, but it has not done anything to remedy the registry entry created by the virus; it is this registry entry that is causing Windows not to be able to run explorer.exe, and unfortunately the Windows error message is not really accurate.
The solution then is to remove the "Debugger" registry key. Then, explorer.exe has no restrictions when you attempt to run it; after you do this, reboot, and you should find that the system is back to normal (assuming there are no other registry entries that have been altered, or other viruses on the system, etc.)"
and DABhand beat me to it.
[Edited by ArchDuke, 7/24/2011 10:15:58 PM]