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Microsoft advertised that Windows Vista needed a video card with on board memory to fully take advantage of all the new features, but also did not make a video card with on board memory a hard requirement. The Windows7 requirements don't mention a video card with on board memory.

Can Windows7 handle running Areo and several applications (word, browser, adobe, etc.) without a video card with on board memory with out taking a huge performance hit?

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Windows 7 can handle that as long as the card is DirectX 9 compatible and has WDDM 1.0 as a minimum. Bare in mind though that a video card using shared memory will use your RAM, so don't be surprised if you have 2GB installed and only 1.5GB usable. Running multiple applications like word processors doesn't affect your video card as much as it affects RAM, although you will see a performance difference between onboard video and a video card with dedicated memory, it may just not be as apparent in smaller desktop applications. Just make sure you have enough memory for the shared video and applications.

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There will be an impact on performance by using the onboard graphics rather than a dedicated graphics card, but the effect might be subtle.. See this question for more information.

Basically the onboard chip is most likely to be sharing main memory with the CPU rather than having it's own dedicated memory. As well as being slower for the graphics, it's taking away resources from the CPU. The onboard chip is likely to be less powerful than a dedicated GPU as well.

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