AVG has finally connected to the update server (after much fiddling with settings), and is updating, apparently for the first time in twelve months.
That is a bad omen. If AVG was the primary antivirus and firewall "patrol", then some virus or other malware could have gained access. Executable files are the primary targets of a virus.
From your description of how the Explorer is acting, it sounds like your version was hacked.. with an almost-identical looking one, but has a nasty trait where you cannot access desired files/folders or other features. Could also be a Registry error. Certain other files are associated with the Explorer feature for proper operation, from the dynamic link library.
There should be two identical copies of explorer.exe on your install. One in the parent folder for Windows, and another in the SP3 folder, i386. Trust more that the original in the i386 folder is authentic.. and copy it over the one in the main Windows folder (overwrite). Hope that is the fix.
There are several good Registry repair programs.. try one and do a scan first, post results here if not proficient with Registry editing. Improper editing of the Registry can hose the entire system!
Hijack This is a good program to bring out the good and bad of a system. But do only a scan first, and post results here. www.hijackthis.com