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Okay let's try some standard things.
1) Rename the AVI folder to AVI_back
2) Set the color depth to 16BIT
3) Turn off everything in the background like E-mail/ICQ/Messenger, Virus protection and everything in the system tray beside the clock.

If none of that works then:
Please run a DirectX Diagnostic:
Start menu –Run - then type Dxdiag, then select each tab across the top of the window, and run the tests on each tab. Then select “Save All Information” button in the lower right of the window. This will bring up a dialog box to allow you to select a name for the file where the information will be saved. You can save it right on the desktop as this will make it easy to find. Then copy the contents of that file from the start to the heading that says “DirectX components” then paste what you have copied into a post in this thread.
 
That's why it is Number one on my list. :)
 
You have something major wrong with your system then if you need to have program manager open while playing the game. ;)
 
I would start with the tsr your wife shuts down for you.
What is the name of it?
 
Those would be apps my standard advice tells you to shut down.
You had mentioned that you had tried the advice here before using the tsr thing, so I assumed you were talking about something more exotic.

My standard advice, found in almost every thread here:
1) Rename the AVI folder to AVI_back
2) Set the color depth to 16BIT
3) Turn off everything in the background like E-mail/ICQ/Messenger, Virus protection and everything in the system tray beside the clock.
 
Shut down the Virus protection.
Most likely it is not compatible, most are not.
If you are paranoid, then unplug your modem from the internet.
 
Are you using any mods or have you edited any of the files?
 
Wipe the game from your system, reinstall, install 1.08, then let me know if it works correctly.
 
Move up to 1.04, things were pretty stable at that point.
 
Update your video driver.