This is a common issue, well to people who pay attension to this kind of thing.
As a sound engineer, this is a very very annoying thing.
As far as I know there is no way to bypass the limiting/compression on windows 7 and vista, as it applies to the main volume control.
Work arounds may be, buy an external soundcard and use that. Digital works best. Though analogue has warmness.
MY favourite work around.. I use XP, problem solved.