I think my situation is very similar to this.
My DisplayFusion settings ONLY work when I have the "Show Desktop Icons" enabled. If I turn off desktop icons, I get different wallpaper settings.
XP SP3 - perfectly clean install - No Active Desktop, No BGInfo...
This is my troubleshooting info:
--- Machine ------------
Operating System: Microsoft Windows NT 5.1.2600 Service Pack 3
Operating System Version: 5.1.2600.196608
Detected Version: WindowsXP / 2003
CPU: x86
Date/Time (UTC): 12/30/2009 19:20:23
Date/Time (Local): 12/30/2009 14:20:23
.NET Framework: 2.0.50727.1433
CurrentCulture: English (Canada) (en-CA ~ en)
CurrentUICulture: English (United States) (en-US ~ en)
--- Wallpaper ------------
Wallpaper Span: False
Monitor #1 Image: D:\My Docs\Personal\My Pictures\Switzerland309-full.jpg (Exists: True)
Monitor #2 Image: D:\My Docs\Personal\My Pictures\porsche7.jpg (Exists: True)
Monitor #3 Image: D:\My Docs\Personal\My Pictures\Walliser_Alpen_2133.jpg (Exists: True)
Windows Wallpaper: C:\Documents and Settings\mathesona\Application Data\DisplayFusion\Wallpaper_2.bmp (Exists: True)
Generated Wallpaper Folder: C:\Documents and Settings\mathesona\Application Data\DisplayFusion
--- DisplayFusion ------------
Name: DisplayFusion v3.1.6
Build Date: Dec 06, 2009 13:45
Pro: False
Pro License: None
Command Line: "C:\Program Files\DisplayFusion\DisplayFusion.exe"
Current Folder: D:\My Docs\Personal\My Pictures
Performance Mode: False
Application Hooks: True
System Hooks Pause FullScreen: True
Process Integrity Level: N/A
Font Scaling: 1
--- DisplayFusion x86 Hook DLL ------------
Path: C:\Program Files\DisplayFusion\DisplayFusionHookx86.dll
Name: DisplayFusion Hook
Prod Version: 2, 1, 0, 0
File Version: 2, 1, 0, 0
Size: 48,304 bytes
--- DisplayFusion x64 Hook DLL ------------
Path: C:\Program Files\DisplayFusion\DisplayFusionHookx64.dll
Name: DisplayFusion Hook
Prod Version: 2, 1, 0, 0
File Version: 2, 1, 0, 0
Size: 46,768 bytes
--- DisplayFusion x86 Hook Exe ------------
Path: C:\Program Files\DisplayFusion\DisplayFusionHookx86.exe
Name: DisplayFusion Hook x86
Prod Version: 1, 6, 0, 0
File Version: 1, 6, 0, 0
Size: 92,848 bytes
--- Monitor 1 (Primary:True ~ Real:True) ------------
Name: \\.\DISPLAY1
Bounds: {X=0,Y=0,Width=1280,Height=1024}
WorkArea: {X=0,Y=0,Width=1280,Height=990}
--- Monitor 2 (Primary:False ~ Real:True) ------------
Name: \\.\DISPLAY3
Bounds: {X=1280,Y=0,Width=1280,Height=1024}
WorkArea: {X=1280,Y=0,Width=1280,Height=1024}
--- Monitor 3 (Primary:False ~ Real:True) ------------
Name: \\.\DISPLAY4
Bounds: {X=-1280,Y=0,Width=1280,Height=1024}
WorkArea: {X=-1280,Y=0,Width=1280,Height=1024}
--- Screens ------------
Count: 3
Point Min X: -1280
Point Min Y: 0
Point Max X: 2560
Point Max Y: 1024
Total Width: 3840
Total Height: 1024
ActiveDesktop: False
--- Screen 1------------
ScreenID: 0
Device: \\.\DISPLAY1
Bounds: {X=0,Y=0,Width=1280,Height=1024}
MoveH: 0
MoveV: 0
--- Screen 2------------
ScreenID: 1
Device: \\.\DISPLAY3
Bounds: {X=1280,Y=0,Width=1280,Height=1024}
MoveH: 0
MoveV: 0
--- Screen 3------------
ScreenID: 2
Device: \\.\DISPLAY4
Bounds: {X=-1280,Y=0,Width=1280,Height=1024}
MoveH: 0
MoveV: 0
--- Managed Threads ------------
Count: 4
ID:44 ~ Name:HookManager ~ Age:00:13:41.9975022 ~ Alive:True ~ BG:True ~ State:Background ~ Thread Name:HookManager_f944f18f-22f8-415f-857c-e6b0efca9263
ID:43 ~ Name:HookManagerProcess ~ Age:00:13:41.9818771 ~ Alive:True ~ BG:True ~ State:Background ~ Thread Name:HookManagerProcess_654610af-cec3-4501-9584-24ea48d6ed14
ID:102 ~ Name:Hook:LButtonDown ~ Age:00:00:00.0156256 ~ Alive:True ~ BG:True ~ State:Background ~ Thread Name:Hook:LButtonDown_88b95f1f-528a-4c9c-98fa-e8ca7ced07c5
ID:103 ~ Name:Hook:LButtonDown ~ Age:00:00:00.0156256 ~ Alive:True ~ BG:True ~ State:Background ~ Thread Name:Hook:LButtonDown_a39886df-68b4-4f04-83ca-190ad58ad784
--- FullScreen Applications ------------
None
--- Taskbars ------------
Enabled: False
Auto-hide: False
Visual Styles: True
Visual Styles Detected: True
DWM Composition Detected: False
Opacity: 100
Flash Blink: False
Middle-Click Open: True
Window Options: ShowRelevant
Button Width Max: 160
Button Icon Size: 16
Sizing Bar Size: 4
TaskbarManager: null
--- Taskbar Items ------------
"DisplayFusion ~ Settings" (0017034a:0017034a:0017034a ~ None ~ {X=236,Y=222,Width=807,Height=546})
"DisplayFusion ~ Desktop Wallpaper" (00220338:00220338:00220338 ~ None ~ {X=232,Y=198,Width=815,Height=594})
"\\cfia-acia\public\Installations\XPInstall\English" (000800ac:000800ac:000800ac ~ None ~ {X=88,Y=88,Width=800,Height=600})
"Post reply - Google Chrome" (00100302:00100302:00100302 ~ None ~ {X=-4,Y=-4,Width=1288,Height=998})
--- TitleBar Buttons ------------
Enabled: False
DisplayFusion Caption Button Size: {Width=14, Height=14}
System Caption Button Size: {Width=18, Height=18}
Thanks.
~Andrew