Agentless Exception Monitoring (AEM) of System Center Operations Manager and System Center Desktop Error Monitoring (DEM) are identical features with the only difference being that AEM is shipped with Operations Manager 2007 and DEM is shipped with Microsoft Desktop Optimization Pack (MDOP) SKU’s. These features leverage the Microsoft Error Reporting (formerly known as Dr. Watson) or Windows Error Reporting client applications for reporting the crash or hang. These client applications are shipped with default settings to forward the Error reports to Microsoft Error Reporting Service. Using DEM, they can be configured to forward the Error reports to DEM or Operations Manager Server.
The attached document describes the steps you need to take to ensure that the Microsoft Error Reporting and Windows Error Reporting are configured correctly. I would like to thank Vishwa for spending time walking me through all the steps to troubleshoot the "DEM" thing :)