Thanks so much for your replies.
It works now (!). While I cannot identify the exact cause of the problem, I find that I can now set the background image without a problem. I have rebooted, cleared the cache, resarted IE, and started with a fresh version of the demo case. One or a combination of these things fixed my problem.
Again -- thanks for the reply. I think you have a done a great job with this product. Congrats.
Regards,
JT