Open regedit and navigate to the following keys:

HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Policies
HKEY_LOCAL_MACHINE\Software\Microsoft\Windows\CurrentVersion\Policies
HKEY_USERS\.Default\Software\Microsoft\Windows\CurrentVersion\Policies

If you see ActiveDesktop key or a string value Wallpaper under the System key, delete it.

Hope you are comfy working in the Registry. Best to create a systemrestore point first.

You may also want to have a look at http://support.microsoft.com/kb/921049 although its shown as applicable for XP.