Windows DreamScene is a utility that allows videos and other optimized animations to be used as desktop wallpapers.

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Step 1:
You need to have Aero enabled. You’ll know Aero is enabled if you’re able to preview windows in your taskbar, use Aero Peek, or see the animation effects of windows minimizing. If you think Aero isn’t enabled, open the Start menu, and type in Aero.
When the video is finished converting, a new window will pop
up. Right click your video and choose Open Destination File Location to
locate the video. You can also access your converted videos at this directory:
Once you have converted the file, just right-click and
select Set as Desktop Background and Dreamscene will begin to
work.

This work is licensed under a Creative Commons Attribution-ShareAlike 2.5 Generic License.
Installing Dreamscene:
Step 1:
You need to have Aero enabled. You’ll know Aero is enabled if you’re able to preview windows in your taskbar, use Aero Peek, or see the animation effects of windows minimizing. If you think Aero isn’t enabled, open the Start menu, and type in Aero.
Click on Find and fix problems with transparency and
other visual effects and go through the wizard. The wizard will
determine whether your computer is capable of having Aero on.
If you’re on 64-bit Windows 7, download this patch and
follow the instructions in Important Readme.txt
Then skip Step 3.
Then skip Step 3.
Step 3: Run the patch and let it do it’s thing. When
it’s finished, explorer.exe will restart.
If it doesn’t restart, press Ctrl + Alt + Delete and click on Task Manager. Right click on explorer.exe and click on End Task. Then click on File, New Task, type in explorer.exe and press OK.
If it doesn’t restart, press Ctrl + Alt + Delete and click on Task Manager. Right click on explorer.exe and click on End Task. Then click on File, New Task, type in explorer.exe and press OK.
Setting video clips as your desktop background:
Step 4: Before you start adding videos, you need to
make sure that your videos are in .wmv or .mpg format. If they are not one of
those formats, you can download a free
video converter here.
Converting a video is simple. Choose Add Video at
the top left corner and choose your video of choice. The drop down-menu in the
right side-bar will allow you to choose your codec. On my computer, .wmv videos
worked properly while .mpg videos would not work with
Dreamscene.
The bottom portion of the sidebar will allow you to change
the video size or bitrate. If you are not sure what those options do, the only
one you should worry about is video sizesince some videos may end
up being too large and get cut off the screen.
C:\users\%username%\Documents\Any Video Converter\

Should you want to revert back to a stationery wallpaper,
sometimes the stopped video will stay frozen as your wallpaper. To fix this,
press Ctrl + Alt + Delete and click on Task Manager. Right click on
explorer.exe and click on End Task. Then click on File, New Task, type in
explorer.exe and press OK.
Note: Desktop icon text will become transparent
sometimes. This is a bug that has yet to be fixed.