XP does not come with a mpeg2 decoder which may be why some downloaded dreams do not work, but the included dreams do not. Usually it should be prompting you when it detects you tried to apply a dream and had no decoder.
Try applying Winter Snow or Stars both of which are included with DeskScapes 3.2. These do not use any video decoders and so should be working for you.
SP2 should be sufficient for DeskScapes, though it is always important to ensure you have the latest DirectX9 updates.