Please do report here if you will experience more encoding problems.
(and also now you can post entries in any non-default languages on 98/ME)
If you get "Decoding error" (that's a separate problem) that means that the data (friend's name if you get it viewing friends, picture keyword or your journal name if you get it on login) has character that is not available for your current codepage. For example, wide 3-byte exclamation sign that looks exactly the same as normal 1-byte one is not available for Japanese locale. If one of your friends has such character in the name (for example, if you added to your friends nihongo_only ) you may not be able to load friend list in client (depending on your system). To solve it enable CP_UTF8 option (only for full unicode version). Do report if it does not help you.
Update: that option really fixed the problem so it is always on now and is hidden.
Additionally, the source of the problems on XP SP2 was located. It appears not to work (i.e. crash) on every network operation if Urlmon is not enabled. But before if you pressed just_edit to enable urlmon the program crashed because checkfriends was on by default and it was making requests in background. Now Urlmon in activated also in login dialog menu. You can choose between winsock and urlmon network API.
(I may suggest that problems with XPSP2 are somehow related to the version of MFC that you have since it does not affect most of SP2 users. Try to remove mfc42u.dll from semagic folder if you have it there from 126.96.36.199 installation or use version for 9x since it uses other MFC libraries.)
Please do update your antivirus software.
or at least delete readme.txt from semagic folder which contains some email addresses because the virus searches for files containing email addresses and send infected spam to or as being from those addresses (to prevent this Semagic distribution also will have all plain text readme files zipped). I do not send any emails from address @livejournal.com listed in that file, especially with .pif attachments and neither sema or bradfitz do (keep in mind that almost all such emails @livejournal.com are forwarding so mail cannot originate from them unless from few system addresses).
Please note that even if you have w95 it is better for you to upgrade IE at least to v5.5 to be able to use some functions that are based on IE (like preview). Note that full Unicode support that was recently added to 9x version is not provided on w95 (at least for now, especially with regard to the results of the poll below).
Tip#1: The easiest way to move a friend between security groups is to click on the name in the friends dialog and select desired groups so that you do not need to edit complete lists of the groups.
Tip#2: If you want to edit old entry in the main window you should press copy_entry in the history item window and paste it as entry into main window. You will see item id of that entry appeared in the post options (near backdate entry). When posting such entry and being prompted about this id you should select to replace existing entry. Do not forget to clear that field (via Reset) if it was saved as draft with that id.
Tip#3: The address of last posted entry (via the client) is recorded after posting and is available in the Web menu. You can use it to verify that entry was really posted because sometimes the main journal page updates with a delay.