I don't know if this project is still alive, but I am forwarding a bug reported in both Ubuntu and Fedora. Along with a patch cherry picked from Fedora resolving the issue.
Fedora bug: https://bugzilla.redhat.com/show_bug.cgi?id=239426
Ubuntu bug: https://bugs.edge.launchpad.net/ubuntu/+source/wallpaper-tray/+bug/355081
Ubuntu report:
"Binary package hint: wallpaper-tray
I've asked wallpaper-tray to only display pictures from /media/docs/wallpapers, but it also displays pictures that are in /usr/share/backgrounds
ProblemType: Bug
Architecture: amd64
DistroRelease: Ubuntu 9.04
NonfreeKernelModules: nvidia
Package: wallpaper-tray 0.5.5-0ubuntu2 [modified: usr/lib/gnome-panel/wp_tray]
ProcEnviron:
LANG=fr_FR.UTF-8
SHELL=/bin/bash
SourcePackage: wallpaper-tray
Uname: Linux 2.6.29-020629-generic x86_64"
patch from Fedora