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Yes, this thing doesn't work. After installing, all my DOS apps just hang.
But props to echoman as he found VDMSound which clears up audio problems 100% and fixes the problem with MP3 audio sounding like it's miles away in the game! WOOT!
Just install it and right click on mugen.exe and select "Run with VDMS" and tada!!
I'm just getting confused. Goddamn DOS emulators and programs that have to do with it always have problems.

The point of the matter is, I have used this software before and I think it works better than VDMSound. In fact there is a link to VDMSound on the webpage that says if this software doesn't work for you, use that instead.

However, Cinder, did you go into the Control Panel and set the settings for the DOS Sound Emulator?
You have to do that also.