I seem to have fixed it by changing the Audio codec to PCM.

Two Sound Mixing with computer sound and microphone sound instantly crashes bandicam (and the game if it is open).

If I uncheck Two Sound Mixing, it doesn't crash, but only the primary sound is recorded.

Windows XP
Sound Card: Sound Blaster Audigy 2 ZS
Microphone: Logitech AK5370 (USB)