In Windows XP, this is even more possible than it was in Win 98!
Go to a folder you want to add a background to, and simply right click the background of the window, and go to View, as Thumbnails.
That will set it so it would display pictures as backgrounds, and now to set the backgrounds:
Right click a folder and go to Properties,
then go to Customise, and then simply click on 'Change Picture' and browse for it. Pressing Okay and maybe opening and closing the folder will make the picture appear.
I hope this helps