I actually have found a solution to this issue after many weeks of conversing with Stardock Support and struggling on my own. Support was unable to help me solve the problem (though I do appreciate the effort), so I thought I would share my results here, hoping it might help others.

I have three PCs running XP SP3 with different AMD processors. One has onboard Nvidia Video (MX440), the other two have Nvidia PCIe cards (XFX 7600GS and 9600GSO)

Symptoms: All three machines have the same problem with DeskScapes: Dynamic Dreams work fine, some Video Dreams play. Most ,however, freeze and cause explorer to fail to refresh the screen. One machine got a completely fresh reinstall of XP (Slipstreamed with SP3) in order to try and solve the problem. Only the latest video drivers, the latest Directx, and the necessary MPEG-2 codec (plus what XP automatically installs) were installed. I had to install  .Net Framework 2 on the machine to satisfy the requirements for Impulse. Other than that there were no other programs installed and yet DeskScapes crashed under the same conditions. To be more specific: Grassy Field (which comes with DeskScapes) plays fine; Big Blue Sea and many others like it crash after a few seconds or sometimes minutes.

Solution: Well, turns out that on my machines at least, DeskScapes has serious problems running WMV but no problems with Mpeg-2. I have video editing software that can convert the WMV videos to Mpeg-2 so I'm able to modify the problem video dreams and create versions for myself that play just fine. Still this is not an ideal solution and I hope that Stardock DeskScape developers will look in to this further. I haven't heard anything though, and I haven't been able to find out if others with XP are having the same problem. So if you are having the same problem with WMV Video dreams, please share your experiences. Let's find out if this is a common problem. Thanks.