1. How many frames can a dream have? is there a limit? if so I really need to know. I really need to have a number.
Normally I do 25fps as I am PAL like you but other fps 24 or 29.97 or 30 can be used - they are all options in AE. The higher the fps sometimes the better the loop appears seamless. Total Dream size maximum is around 100 mb. So if your mpg file is too large you use TMPGEnc to cut down frame rate and quality but it should not be a problem normally.
2. What format do the dreams have to be in? png, bmp jpeg?
mpg2 or wmv movie file but mpg uses less resources so is better. In TMPGEnc sometimes m2v is the option to export to so just rename the extension to mpg. Once you get the mpg or wmv use DreamMaker to make the dream, The thumbnail is 256 x 144 ish whatever the vertical size comes to using the aspect ratio of your preview image.
3. Once I have all the frames for my dream, how do I compile them into one animation? Does dream maker do that for me?
TMPGEnc will compile the pngs into a movie mpg or if you do more effects after in AE I export to mov: Use TMPGEnc only to make your mpg or wmv - if you use any of its video effects the loop will stutter - do all effects in AE. In AE I normally export to an avi file then use TMPGEnc to turn that into the mpg. The settings used are in Carguy1's links above. Photoshop Enhanced will also compile images to movies for you, 32 bit only even in CS5.
4. Do i need to make a preview movie for it? or is it okay to not include that?
It is optional, AE will make the swf though or VisiFly does it easily too. Some folk prefer to see a video sample but it can only be 2mb in size so for a larger Dream it may not show the full loop or the loop made is jerky and/or low quality due to really low fps needed to make it fit in 2 mb.
Read the various tutorials listed above and the Artbeat ways to loop seamlessly here both methods are used - the linear wipe one mainly only when the first and normal method causes ghosting of fast moving objects like leaves in wind.
Creating Hybrid Dreams by ID here. NWABuild.exe is in C:\Program Files (x86)\Stardock\Object Desktop\DeskScapes3. More documentation in this here folder too.
Check out C:\ProgramData\Stardock\DeskScapes\ExtractedData to see how Dreams are handled, need to show hidden stuff in folder options.