ATI Recently released 7.8 Display Drivers Catalyst Control etc etc
Upon installation of these drivers on Vista Ultimate x64 My deskscapes no longer worked as they should, instead they became horrible a blocky mess, after playing around for a while I found the culprit to be ATI's AVIVO64 Video Codecs.
If this issue occurs for you, to restore Dreamscenes/Deskscapes begin the ATI Catalyst Control Uninstaller select Custom (NOT Express) and then proceed to uninstall ONLY the AVIVO64 package.
This worked for me, so somewhere they're affecting Deskscapes/Dreamscenes, hopefully a fix will be available soon.