AFter months of struggling to cap over 240 in avi mode I have finally fixed the problem on my system. I capped Full DVD res in AVI mode using VirtualDub with no problems.

Heres what I did. I think this works only under win98.
"Thanks alot to www.pcphotovideo.com most of the info I got from that site"

First follow the instructions here to install and uninstall previous ATI display drivers and MMC.
http://www.pcphotovideo.com/ati.htm

Make sure you download the driver I linked below. Dont get the lastest driver, that was my problem all along.

Dowload link to MMC 6.3
http://www.pcphotovideo.com/Downloads/MMC63.ZIP

Download Link to Old ATI driver that works(win98 only)
http://mirror2.ati.com/drivers/w98r1284126269EN.exe

My card is the ATI ALL-IN-WONDER128 16MB Version