Integrated sound is ok, but only until you hear the "real" sound a X-Fi Extreme Music (or better) spits out. Don't even need to have a surround system, just the simulated 3D effect is absolutely bombastic. E.g. I play BF42 with a headset and 3D-simulation enabled and I always can tell very precisely where the enemies are, I don't even need to see them. Especially aircrafts or tanks that are hidden in the fog or behind hills are clearly audible. Helps a great deal. Of course, a decent headset is a must-have... I suggest either Sennheiser or my personal favourite (because it offers incredible audio detail for a low price), the Plantronics Gamecom 377 (costs around 30€ here in germany). It's just fantastic. Very clear sound, no noise, and formidable microphone (well, plantronics used to make callcenter headsets, of course their microphones rock).
I think Hardware doesn't work in BF42 and Win7 simply because it no longer is supported. No biggie though, cause Win7 has a very good sound API built-in. I'm unable to notice any differences in sound quality between "software" and "hardware" in BF42. Of course, BF42 "hardware" never was that great to begin with
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Hardware support works fine in newer games.