Well... Back in the day that was used to save your poor cpu from the agony of playing an audio cd. The signal would go directly to the sound card via that cable giveing you more cpu time for other tasks. Now days the cpus are so much faster it really doesn't make a difference. People are switching over to mp3s, ogg, etc anyway so regular cds aren't even played in cdrom drives anymore. Ripped maybe, but not played.
You can plug it in if you want but it really isn't needed.
Older CD-ROM's did a poor job of DAE (Digital Audio Extraction). The solution was to simply play the CD's as an audio CD and send the audio signal to the sound card via a cable. Newer CD-ROM's are very good at DAE, so MS changed the default to use DAE rather than analog cables.
XP uses DAE by default
98SE uses analog audio by default.
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