The Software option means something like this...
There is some software code that handles the proccesing of sound, and your CPU caters to processing the instructions in this software 'sound' code. So CPU cylces are used to process the sound.
Hardware means that you have a supported piece of sound hardware, such as an Audigy 2 sound card, that can process the sound instead of having the CPU do it. So, some load(cpu cycles) is taken off the CPU since it is now being handled by the dedicated peice of sound hardware. I believe the hardware sound option can give you a little bit better sound too, as the dedicated peice of hardware does more processing of the sound than the software/cpu option does.
SneakAttack, well, if your sound card was listed as supported and you were having a complaint about it not working properly then I could see how you'd have a problem. But, that fact that you wrote about it not working properly shows that, well,
it isn't working. If it's only working half-assed then that really isn't what I'd call working. Again, if your card was listed as supported but it was only working half-assed, then I could see how you'd have a problem.
Tell your folks that you would like an Audigy 2 ZS for Christmas.

Or if you really want to go all out then ask for a Creative X-Fi sound card.
http://www.tomshardware.com/consumer...818/index.html
Regards,
OneTinSoldier