SOLUTION: Installing Windows 7 SP1 RC resolves this issue.
Please note: Windows 7 SP1 RC is for testing purposes only. If you are not familiar with beta software, or are not comfortable with troubleshooting beta software issues, you should wait for the public release version of SP1. The scheduled
release date for SP1 according to Microsoft is in the first half of 2011. I suspect it will be as early as the first week of March. This RC version will insert a time-bomb in your Windows. It'll add anexpiry date of Nov 30, 2011 to your Windows.
So you can use your system till Nov 30, 2011. After that you'll need to either upgrade to final version of SP1 or uninstall RC version of SP1 to be able to use your Windows. SP1 RC will also add a
watermark on your Desktop which says: Windows 7 Evaluation copy. Build 7601
You can download SP1 RC here - http://technet.microsoft.com/en-us/evalcenter/ff183870.aspx
I was correct to suspect this was a Windows 7 issue, rather than the sound card driver issue. I still think the problem has to do with the way Windows 7 allocates physical memory for hardware resources. I am still not clear why Windows 7 reserves 1GB of
physical memory for hardware in a 4GB system, leaving only 3GB useable physical memory for the OS and programs.
I have only tested this solution with a Windows 7 32-bit clean install on Dell E520 with 4GB of RAM and the Sound BlasterX-Fi XtremeMusic (SB0460) PCI card. I was able to make the sound card work with
the Creative Labs beta driver version 2.18.0015 and the beta Creative Console Launcher version 2.61.49. You can download these from the Creative Labs support site.
I also was able to make the sound card work with the unofficial and unsupported AuzenForte Pack 1.0. If you want the optional components (like the Volume Panel , THX Console, AutoMode
Switcher, etc.) you'll need to install this pack. The driver version contained in this pack is 2.20.0000.27 RC1, and the console launcher version is 2.61.44. You do not need to install all the components contained in this pack. Just select 'Cancel' for any
components you do not wish to install. You will also get a warning from Windows 7 when it tries to install the driver, select 'Install driver anyway' here. You can downloadAuzenForte Pack 1.0 here
(Warning: Install at your own risk) - http://forums.creative.com/t5/Sound-Blaster/SB-X-Fi-Series-AuzenForte-Pack-1-0-06-14-201-0/td-p/557866
How to uninstall Windows 7 SP1 RC?
1. Open Control Panel and click on "Programs -> Uninstall a program " if you are using "Category" view.
If you are using "Icons" view, click on "Programs and Features " icon.
2. Now click on "View installed updates " link given in left sidebar.
3. Select the "Service Pack for Microsoft Windows (KB976932) " item in the given list and click on "Uninstall " button in the toolbar. You can also right-click on the update and select "Uninstall" option.
4. It'll ask for confirmation, click on "Yes" button.
That's it. It'll take some time and will uninstall SP1 RC from your system.
Please post back, if this solution works for you. Good luck and thanks to everyone who has posted on this issue.