Windows 2008R2 audio crackling

OS
Windows 2008R2

Sound card
Audio card: Auzentech X-plosion 7.1
Audio controller: C-Media (6.12.8.1738)
DirectX: 11
Output port: SPD-IF

Problems:
MP3 audio skids, makes crackling sounds. All windows sounds like IM, have been disabled. Cracking sound increases when I open 'Device Manager' or 'Browse directory'. MP3 files are on a separate physical hard drive. This problem persists even when the OS is practically idle(no internet browser, video player, Adobe, msword, etc..). This is playing MP3, not streaming or playing DVD.

1) AudioDg.exe is not taking lot of memory. Event Viewer says: "Windows Audio Device Graph glitch threshold count exceeded". Most probably this is the culprit. Every audio goes through this stupid exe.

2) I did not have any such problem with previous OS that is WinXP. Current OS is a fresh/clean install.

I may have to go back to Win32XP because I see many other symptoms that tell something is really wrong.