There, in fact, IS a way to play Jim with sound in XP. First, download the Microsoft Application Compatibility Toolkit from here:
http://tinyurl.com/mw4kq
(It's a really long address, so I used TinyURL. It leads to file you want on the Microsoft website.)
MS will make you jump through a couple hoops in order to confirm that you have a legit version of Windows, so you'll have to bear through that.
Once you have the Application Compatibility Toolkit installed, go into the toolkit's folder on your Start menu. There should be a Tools subfolder and a "Framework" shortcut. Go into the Tools subfolder and open the Compatibility Administrator. Download this:
http://psychosesman.googlepages.com/EWJimSoundFix.sdb
Open it in Compatibility Administrator. Under "Custom Databases" you should see a "Earthworm Jim 95 in XP" item. Right-click on it and click "Install". Assuming your executable is called "EWJIM3.EXE", this should make it not freeze when it plays sounds. The "dispdib.dll" error will still pop up, but if you just click OK and ignore it, the game will run fine. If the sounds stop playing when you load a new level, simply open the game's Sound menu, uncheck "Sound Effects", close the menu, then open it again and re-check Sound Effects. This should work. Also, rest assured I will do my best to upload the full version with music when it arrives from eBay within the next week or so.
I registered specifically to post this because I got really frustrated before I figured it out and I wanted to save others the frustration. I hope this works for you.