Yes, the DacMagic is compatible with Windows 7, but as the DacMagic was released prior to Windows 7, it was not possible to test the DacMagic with Windows 7 until its release.
The initial Windows 7 audio driver for USB doesn't work with the DacMagic and that is what will install by default.
As such, for the DacMagic to work with Windows 7 you need to install the correct driver for the DacMagic - CM108. To do this, follow the instructions below.
Click the following link;
The correct C-Media driver for the DacMagic is CM108, which this link takes you to.
Click on the 'Softpedia Secure Download (US)' (zip) file and click 'save' when prompted. Do not click 'open'.
Select a destination to save the download to (usually desktop is most convenient as the downloaded zip file can then be easily deleted when this installation is complete).
Once the download is complete you can close your web browser and then open the downloaded zip file 'cm108_61282104_vista' from wherever you saved it to.
Once the zip file is open simply double click the 'setup' file at the bottom of the folder.
The driver will then install itself (you may have to select yes to allow it, if prompted by Windows) and once complete you will be prompted to restart yout computer.
Once you have restarted, the DacMagic should now work and the LED on the Incoming Sample Rate indicator on the front of the DacMagic will now be illuminated, indicating that the DacMagic is now receiving audio over the USB connection from Windows 7.