Damn! Your VM is set too high!!!!
Bring it down to 257mb.

Increase LW *preferred*
memory-100%-200%

Rebuild your desktop.
http://docs.info.apple.com/article.html?artnum=10182 Rebuilding Desktop File and Icon Recovery.

http://docs.info.apple.com/article.html?artnum=18278 Mac OS: Assigning More Memory to an Application Program.