I think this happens because your flash1 is probably corrupted, or some plug-in you are using is messing things up. First try disabling all your plug-ins then set your wallpaper. If it still don't work try checking if you are missing folders in your flash1.
This is what Flex2006 said to fix his:
I have had this problem before and it was due to missing folders on my flash1.
The following folders should exist inside flash1:
\dic
\gps
\net
\net\http
\vsh
\vsh\theme
If they do not then it will not have anywhere to save your wallpaper / settings. I found that even doing a restore system settings did not recreate the correct folder structure and i had to do it manually.
My method was create the folders on memory stick by creating the following batch file (copy and paste into a text file and save it with a .bat extension):
MKDIR f1\dic
MKDIR f1\gps
MKDIR f1\net
MKDIR f1\net\http
MKDIR f1\vsh
MKDIR f1\vsh\theme
This will then create the correct folder structure on your memory stick. I then used File Assistant (much easier to use than PSPFiler) to copy the folders from the f1 folder into flash1. Voila! All sorted
Downlaod File Assistant here:
http://www.psp-hacks.com/file/376If you duno how to do that, I think you can fix it using Flash1 Formatter. It just came out, apparently it helps you recover from a corrupted flash1. Here is a link: (Edit:

somehow they won't let me link it... keep replacing it with some weird sentence... oh well just google it.)