Effects work on ALL dreams and always have done.
Au contraire, my fine amigo, I have tested this on Vista 32 on a one monitor system (nvidia graphics) and Windows 7 x64 with 3 monitors (nvidia graphics) and while the preview shows an effect working on Photodream, hitting Apply causes the monitor to refresh one image every X seconds, smearing the background, and losing the background image, etc. Then it kills all the dreams (on the multiple monitors) etc.
BUT, for you, sir, I just did a test on an ATI radeon equipped Windows 7 x64 and it worked!!! So methinks this is an nvidia to Photodream/dynamic dreams issue.
Note that video dreams with effects work fine on all platforms I have tested.