By checking this forum I saw more people have this problem. So here's how I fixed it.
1. I downloaded W2k SP3 install files.
2. Extract them and get the shell32.dll file
3. Replace the existing shell32.dll file (in %SystemRoot%\system32 dir)
4. Reboot

-Take a backup of your existing file first.
-I couldn't copy over the file (locked or something like that). I worked around by first moving the original file and copying the new file over the (strangly) still existing file.

If somebody can put the file online I can mail it ;-)

Hope this helps.

excuse as I'm a newbie not wise in the ways of dll's...

i'm having same problem but have already upgraded to W2K Sp3 - how will this change anything? has litestep overwritten shell32.dll?

does this fix the problem wherein once the new folder finally pops up its name isn't highlighted to enter a new folder name (the way stock windows does it)?

congrats, man.. if only I could understand how you overwrote a locked file. cld you link me up to the shell32.dll that you used to fix and maybe give us a better description of how you replaced the file?

Well in fact very strange :-)
Deleting or copying over the existing file doesn't work.
I'm using 4NT and did this:
move shell32.dll shell32.dll.orig
xcopy SP3location\shell32.dll shell32.dll

After the move the shell32.dll file still exists but is overwritable ;-)
just check out the size of the files before and after the action
Strange stuff but it worked for me.

If this doesn't work, maybe boot windows with only the command prompt...

for mweier:
For me it fixed that problem.
It is not SP3 that put this "buggy" shell32.dll in place but one or other hotfix (explained in another thread in this forum).
I simply took the shell32.dll from SP3 and replaced it in my system32 directory.

If somebody has a place to put this working shell32.dll file I can mail the file to him...

Send the file to me, I can host it.

I'm trying this to change the default folder icon. I hope it works.

You don't need another shell32.dll to change the default folder icon. Check out registry HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows\
CurrentVersion\explorer\Shell Icons
Found more info about here http://hp.vector.co.jp/authors/VA011111/works/ml_fld14/readme_e.htm

Here is the shell32.dll file:
Original file, 2.26 MB.
Compressed file, 774 kB (write 'expand shell32.dl_ shell32.dll' to expand it).

Here is how I installed it:
Renamed shell32.dll to shell32-orig.dll in 'C:\WINNT\system32\dllcache'.
Copied in the new shell32.dll into that folder.
Renamed shell32.dll to shell32-orig.dll in 'C:\WINNT\system32'.
Copied in the new shell32.dll into that folder.
Rebooted the computer.

ElDomenaaik,

This works for you? I already have those set to other icons, but I still get the dumpy yellow standard ones packed in shell332.dll if I am using Litestep as my shell.

ElDomenaaik: About the folder icons - look here. It sounds as if it does work for you, do you have any information on this?

To frugus... remember you should rebuild icon cache

yup, that's the first thing I did. Nothing. Are you using Win2K, or WinXP? I know icon changing used to work for Win9X, but I've never been able to change the default folder for Win2K, or WinXP

wicked, the shell32.dll swap worked. thanks, guys :)

To frugus: I use win2k and use another icon for folders and other default ones from shell32 (by replacing it).

frugus: for changing the icons I followed the steps explained on that site
It works well for me, but I think there is more than the icon cache file.
Maybe close all explorer's and IE's?

To avoid this problem remember not to do one 'critical update' (810649: Security update) when doing a windows update.

For more detail have a look to this thread.

Unfortunately I think that that crit update is integrated into SP4 (am I wrong?). So I'll have to find an SP3 install around here, eh? grumble...

edit: checked microshiz website, apparently it is...j00ish. all I have is an sp4 pack laying around, and the above links to shell32.dl_/dll don't work...

edit: ooh, found sp3, will get shell32.dll hosted on my university webspace asap...

edit: Wonderful. Went through all that trouble and it didn't work for me. I move the shell3.dll file that was there to shell32.bak.dll then copied the one I extracted from sp3 over the file windows put back there. I don't think Windows like me swapping files from SP3 into an SP4 instalation.

Woe is me!

I see as my only other alternative getting an explorer replacement that also replaces the open-a-file/save-a-file dialog, because I do much of my folder creation there...

Of course I could always go back to explorer as a shell...