That's because W7 (and Vista) have a new audio mixer that provides noticeably better quality audio (and virtually no distortion). The new audio mixer uses a 32-bit floating point algorithm, as opposed to XP's 16-bit fixed point algorithm.
This is why a lot of people on XP tend to use ASIO or kernel streaming plugins for media players, so as to bypass XP's mixer for better audio quality (whereas in Vista/7 you'd realistically not be able to hear any difference at all when bypassing the mixer).