Found this worked for me -written by Linda Yan Microsoft tech moderator
The issue should be caused by damaged or incorrect registry key entry. Please check the following registry value:
1. Click Start, type regedit in Search Bar, and then click regedit in the Programs list.
Note: If you are prompted for an administrator password or confirmation, type your password or click Continue.
2. Locate and then click the following registry subkey:
HKEY_CLASSES_ROOT\Directory\Background\shellex\ContextMenuHandlers\New\
3. Please check if the value for (Default) is: {D969A300-E7FF-11d0-A93B-00A0C90F2719}
If the issue persists after changing the registry key value, please continue to try the following suggestions:
1. Click Start, type regedit in Search Bar, and then click regedit in the Programs list.
Note: If you are prompted for an administrator password or confirmation, type your password or click Continue.
2. Locate and then click the following registry subkey:
HKEY_CLASSES_ROOT\Folder
3. Right click on the Folder key on the left pane, and then select "Export" to backup this registry key.
4. Go to my Skydrive and download folderfix.zip file.
5. Save the folderfix.zip file on to your Desktop.
6. Right click and extract the folderfix.reg file.
7. Right click on the folderfix.reg file and then click Merge.
8. Click Yes to confirm the modification.
ALSO:
Here is a guy on youtube that will give you step by step instructions