monkeynut,
Can you unload WB and use Display Properties\Themes tab\Theme list to select and apply the default "Windows XP" theme?
Sorry - I did not see you answer that one.
Do you now have, or have you had other Stardock programs as listed by 'dragonmage' in comment #9?
If so, you might try clearing the cache for those programs as outlined in this mini tutorial http://corkyo.wincustomize.com/Articles.aspx?AID=82461
Note - there is no folder named "cache", you will just need to delete the folder bearing the program's name (after unloading the program) found in "C:\Documents and Settings\USERNAME\Local Settings\Application Data\Stardock" folder (as outlined in the mini tutorial).
Clearing the cache removes any user preferences and forces the program to load with the defaults.
Note #2 - if all of the above fail, I would suggest applying the "Windows Classic" theme via WB configuration panel, and then going into the "Basic Settings" and deselecting the "Apply any wallpaper supplied" option > click "Apply Changes" > reapply the skin in question > reboot and see if you can successfully apply a wall via Display Properties\Desktop tab\Background list.