Another thing I have seen fix this specific error is temporarily disabling your wave modem device, rebooting and trying again.
Sometimes DirectX will use your Wave Modem as your preferred device. Make sure in the Multimedia properties that your sound card is listed as the preferred audio device.
Sorry but I can't fix Microsoft's stuff
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Sarge is coming...
Richard Arnesen
Director of Covert Ops
Shrapnel Games
http://www.shrapnelgames.com