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Only DirectInput provides support for more than 5 buttons on a mouse. DirectInput mode is pull-based while the other two methods are pushed-based. Raw mode distinguishes between multiple keyboards/mice under XP/Vista, but does not support horizontal mouse wheels and won't distinguish between right/left control/shift/alt keys (and doesn't work under w2k and w9x). You must set a keyboard API other than disabled if you want PCSX2/GS hotkeys to work. Windows messaging is the recommended mode for keyboards and mice, though any mode except disabled should be fine for most people.
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The modes are: Windows messaging, raw, DirectInput, and disabled. Mice and keyboards both have 4 input modes. The input API sets the Microsoft input API LilyPad uses to read input.
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