Unfortunately, this appears to be a known Microsoft issue. This problem occurs with NetMeeting and even Terminal Services.
Here are two links with more information:
http://support.microsoft.com/default.aspx?scid=KB;EN-US;Q260565&
http://www.computing.net/drivers/wwwboard/forum/1646.html
Fortunately, we may have a workaround. Try disabling low-level hooks in the host properties of winShadow. Reboot and retest by running dxdiag or one of the games that previously failed. If that doesn't work, try removing the winShadow Mirror Driver in the Display section of My Computer->Manage. reboot and retest.