I am having an issue similar...
1.2 will not allow dynamic dreams to run such as waterdream/desktopearth/watercolour, the ones you get with 2.0, however since my expired sub if I select those dreams in 2.0 they don't run... nothing, just get a black desktop or frozen still image of a previous non dynamic dream.
I have tried both 1.2 and 2.0, both play normal dreams without issue, but both will no longer play dynamic dreams having reinstalled on my vista ultimate 64 system, don't think it's a codec issue, maybe a dll issue after constant install/uninstall- removing folders and registry entries?
Recently I tried the updated waterdream from dreamer, however that always gave me the error message about being unable to load the dll error 126 i think...
However, that no longer happens, just no dynamic dream functionality..
any clues?