Been there done all that.    Three out of four Dells I have had, one 8200 Towers,   one 8200 Inspiron, and one 8100 inspiron.   Three different video cards, all gforce,  and different DVD drive.  I finally got one 8200 tower to play DVD's so far!!!!   25% of my Dell computers worked with DVD.

All got that error.  Can't create overlay.   Tried WinDVD,  PowerDVD and InterActual softwares on all three.  Have re-installed XP 3-4 times,  spent almost 6 months trying to fix the problem.

My theory is that Dell and/or Microsoft XP, or Gforce have a problem someone is not living up to and we get stuck with it. 

If I were to put my money on it, I would say it is a Dell Bios problem.

All I know, is Dell can not give us answers and fixes that work.  

I have finally figured out what the problem is with the create overlay failed message is whenever trying to load Intervideo/WinDVD!!!!!!!!!!! I've read the suggestions and they never worked. Here is what fixed my problem: 

(Direct X 9) See if the Hardware acceleration is enabled. Go to Start, Run, and type in dxdiag. A diagnostic tool will open then click on Display and under display you will see DirectX Features. There are 3 acceleration and all three of them should be enabled. It's DirectDraw Acceleration, Direct 3D Acceleration, and AGP Texture Acceleration. If they are indicated as "Not Available and Disabled" then this is another reason why you are getting the error message when playing WinDVD software. Try downloading DirectX 9 if all else fails. Hope this helps? 

I found this fixed my "Overlay Failed" problem (WinDVD 4 on Windows Server 2003):

-start \Windows\System32\dxdiag.exe

-go to "Display" tab

-if DirectDraw Acceleration is enabled, still click on it; it will ask you whether you want DirectDraw AND Direct3D enabled; Direct3D MUST be enabled for WinDVD to work, irrespective of resolution and color depth

-test both; don't bother about AGP

-close and start WinDVD

Hope this helps

If you have a CPiA, get a Margi DVD to Go Card and use that hardware decoder instaed of just software. I have a CPiA and although I did not get that error message, DvD play back was choppy with 2 different software decoders. Playback is Fine with the Margi Card.

What if Direct Draw's button says "disable" but is greyed out?  I tried the "Test" buttons and it passes the DirectDraw tests, fails the Dx7 Direct X test and passes Dx8 and Dx9.  But then they are still both not enabled and the buttons are greyed out.  I've tried reinstalling DirectX but no go.  Also made sure I had the latest drivers and everything.