I finally got it to work by uninstalling all ATI software and then installing MMC 8.8 Disc id 180_V01085_100. The WDM drivers need to have the text (Microsoft Corporation) next to it. Before it didn't have that.
I'm able to capture
HuffYUV at 704x480 using MMC 8.8. I'm also able to capture
HuffYUV using
VirtualDub at 720x480 with no frame drops.
However a new problem appears in
VirtualDub, when Video is set to Overlay and audio playback is enabled, it will NOT capture. I have to disable audio playback, then it will capture but this also disable Overlay. CPU is at a low 20%.
To be able to see what I'm capturing, I have to set Video to Preview which increases CPU to 60% and increases likelihood of dropped frames. When I start moving my mouse, it can spike to 80%.
So what I've learned is you have to use the CD driver that came with the graphics card and single core CPU is not good enough for lossless capture.