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Well, as mentioned in the release notes, the different versions of Windows Media Encoder have some pretty big stability issues under Windows 95/98/ME. It's highly recommended that you select Windows Media Format 7 capture method under these operating systems.
If you can give more details about the problem you are experiencing under direct capture, we'll hopefully be able to isolate and fix the problem.
In particular, the activity log will help to track down the problem is most cases.
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