I am attempting to use bsetbg to display background images in fluxbox. However, no "suitable image applications" exist. Which image application should I use? I use xterm btw.

How exactly are you trying? It should be:

bsetbg -f /path/to/image.jpeg

for example

Here is another link that you might want to check out:

http://linuxquestions.org/questions/history/158936

Chinaman explains another method of changing background that I use myself, editing your theme by the RootCommand line. Read the thread and you will understand very well

Good luck!

commandRoot: bsetbg ~/.fluxbox/backgrounds/mybackground.jpg

When I switch styles, (from one with bsetbg -solid white to the one above for example) the background does not change. When I check the first virtual console - it displays the error mentioned in my first post.

One of the posts in the link you provided mentioned a script in ~/.fluxbox/bsetbg -this doesn't exist for some reason... when I type bsetbg at the prompt it responds that ~/.fluxbox/bsetbg was not found: creating...
bsetbg: checking for display... not found
bsetbg: checking for Esetroot... not found
bsetbg: checking for wmsetbg... not found
etc.

So it ends up with the same error I see in vc1. So the file can not be created because a suitable image application does not exist. I checked, and bsetbg, and bsetroot are installed. Strange.