under windows xp and presumably most other versions of windows the backgrounds folder that Display properties uses is in the folllowing directory
$System%20Root$/WINDOWS/Web/Wallpaper/
i have used system root as it means the dirve to Operating system is installed on
Any files placed in that directory will appear in your display properties under wallpapers and will be availiable to all users of the pc. There is a way to set it too display all pictures in your My Pictures folder under My Documents folder, this can be automatic on some computers, mainly windows XP. Am not sure on any others.
Hope it helps
When you click a picture and say 'set as background' where does Windows store that picture. I'm using Firefox not IE if that matters at all. THank you for your help. At first I only wanted the picture temp but I want ot change the background but not lose the picture and I can no longer find it on the original source. Thank you so much for your help

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