I really don't want to do a fresh Windows installation, but I'm getting the feeling this is going to be the only way to resolve this issue?
That won't help this situation at all. Just a waste of time. Themes are
very simple. Point to a directory, display the contents. Windows will not affect whether that works or not.
The only time I have seen what you are describing is when I tried to use a Theme with a WMV video background, and MC wouldn't play the video, just showing a black background. The Default Theme should only contain JPGs.
What I suggest you do is use the "Create zip file of current theme" function to create a zip of the Default theme on your calibration system, copy that zip to your HTPC partition, delete the Default theme directory, start MC and then use the "Install theme from zip file" function to reinstall that theme. Then make sure that the Default theme is selected.
Basically, just make sure that the Default Theme directory only contains the original Default Theme files, and no others, and that they are all viewable.
See how that goes.
Oh, also, if you have the "Online media slideshow" setting turned on, when you are sitting in a list of TV Episodes then images relating to the highlighted program will be displayed. If you have the "Online media slideshow" setting turned off, then Theme images should show behind episodes.