Hello - I found my earlier suggestions didn't solve the problem
However, I've got some clues that help to identify it more.
I noticed if you use Winamp or Media player to play a song
and then pause, as long as the player is in the paused state,
the windows "system events" sounds work just fine.
I found a post where somebody had written a small program
to run at startup that merely initialized a directsoundbuffer
and then went to sleep. This also fixed the problem.
The author intended this for XP; the problem still occurs
there, but it's different. There isn't a perceivable "lag", but the sounds will still truncate.
I tried his utility in WinME and it doesn't work as well
as it does in XP. Still, the author supplies the source,
perhaps we can figure out what to do.
PS I opened an incident with M$. They were very interested
in this evidence, but could not promise that it would be fixed.