Does this mean I need cursor xp on my machine also?
No. You don't need Cursor XP also.
What could I possibly be doing wrong?
You're not from what it sounds. CursorFX looks for it's themes by default in the sub-directory indicated by Cavan1: C:\Documents and Settings\All Users\Documents\Stardock\CursorFX\Themes. It sounds to me like something isn't working right with the install or running of the program. Please keep in mind Cursor FX is new and you may have other software running that won't play nice with Cursor FX.
Don't pull all your hair out over it. If what Cavan1 suggests doesn't work send an email to support@stardock.com. I don't know if you are using Stardock Central(it's free) to manage your Stardock programs, but it's a good idea to use it. Here is a link for an article on how to use SDC
WWW Link. Here is a link for downloading Stardock Central
WWW LinkIn any case please be patient. You've gotten as much help from the community as we can give. Email support@stardock.com, if you have any further problems.