I had the problem of audio distortion, clipping and compression after I installed Windows 7. Nothing worked although I properly updated all audio related drives until I stumbled upon new settings interface in Windows 7 which I did not suspect. Here is what I did, which completely solved my audio problems.
Go to Control Panel > Hardware and Sound > Sound > Playback tab.
Right click on a playback device, and choose Configure Speakers.
The default is set to Stereo. I recommend choosing Quadrophonic if you do not have a subwoofer, and 5.1 Surround if you have a subwoofer connected. Go through the tests and confirm OK. Go through the rest of the playback devices. Finally, re-confirm default playback device (even if it was already set as default device – by choosing a difference device as default first then re-selecting the intended default device).
Give an audio source such as YouTube a try. I was surprised all my distortions, compressions and clipping issues were now completely gone.