Applying Desktop Background To Users

Would it be that, because i have deployed the image as a pkg rather than a DMG?

No, the only reason it would be a problem is if you were planning on using either the FEU (Fill Existing Users) or FUT (Fill User Template) options. Both of those only work with a .DMG file, not PKG (unless you actually script it to simulate those options)
If you deployed the image into the root /Library/Desktop Pictures folder then the MCX isn't being applied, or, depending on the OS we're talking about, the MCX may not be working with it. Some MCX settings don't work properly anymore with Mountain Lion as Apple is moving in favor of Configuration Profiles instead.

Can you tell us how you're applying your above MCX setting? Is it set up as a Managed Preference in your JSS? Are the Macs properly scoped to a Managed Preference Profile that has it checked on?

It would only need to be a .dmg if you used the FUT and FEU check box (Fill user Template, Fill Existing User Options) to use those you would need to capture the preference file com.apple.desktop.plist in the users Library/Preferences folder. Make sure it is pointing to the Desktop Picture you added. For MCX it would need to be a User managed Preference and not a machine I believe.

Your mcx settings look right. Are you setting this as enforced or every login? I've found that enforced works on 10.5/10.6 but not on 10.7. For 10.7/10.8 I'm setting it at every login.

Hi

Thanks for your posts. Were on 10.8.1 and were using managed prefrence profiles that look at the various groups in AD (eg. staff, students, all) The other prefrences are applying.
The managed prefrence is set to apply user level at every login and it looks as if it's not applying.

I had problems getting a custom default screen to take when developing our 10.6 images. For 10.8 I used a brute force approach: I replaced /System/Library/CoreServices/DefaultDesktop.jpg and /Library/Desktop Pictures/Nature/Aurora.jpg with my own graphics during the imaging process. DefaultDesktop shows up on the login screen, and my Aurora (the OS default) is loaded for every user, until they change it. (This Preference, in turn, is locked down by MCX on older machines, and I expect to use Configuration Profiles to do this under 10.8).