Integrated, or on-board, audio chips are included in most modern motherboards. Like sound cards, integrated chips have DAC’s, amplifier circuits, and jacks. Unlike sound cards, integrated chips do not have dedicated ram or audio processors, requiring them to utilize system RAM and your computer’s microprocessor, resulting in a slight decrease in overall system performance. For most applications, this performance difference is negligible; only perhaps 2-4 Frames-Per-Second.
Because the integrated chip must be made to fit onto a motherboard, they generally eschew features such as EAX or 3D positional audio. Some advanced on-board chips may support these features, but they are provided through software rather than built in to the hardware, and can result in slightly more of a performance drop. Another drawback to cramming sound onto a motherboard is that less care can be taken to reduce parasitic capacitance, and the proximity to the other parts of the motherboard increases EM interference over the signal path. This has the effect of lowering signal clarity and producing higher levels of noise and hiss than you would find in a stand-alone sound card solution. Many on-board chips are starting to include S/PDIF optical connections, which do help to improve the signal clarity.
Any consumer who wants their computer to produce the best possible sound should consider buying a stand-alone sound card. They are far superior to any integrated solution in terms of audio quality. Gamers will enjoy being able to get more information from their headphones, while recording engineers essentially rely on sound cards to get the best possible recording quality. If audio quality is not a major concern for you, it might be wiser to stick with an integrated solution.