Ahhh i still remember now the crappy mono tones that came from the tv as i turned on my amiga. How far games has come as an industry is evident in every aspect but with sounds its one of the few factors that is almost never recognised.
Its evolution from mono to multi channels was similar to that of the mobile phone howeever it all happened at a much more rapid rate. I remember Mario back on the snes, the sound was aweful with only 5 channels but then it was released on snes in stereo and that was basically like the leap from mono phones to poly phones except there was no hype as graphics always overshadow every other aspect. Further advancements have now brought it up to CD quality but it has taken many many years to reach that.
To the main point though, how is sound used in games?? Well sound is definatly one of the key elements for realism in video games. It gives the ambience and life feel perhaps in todays consoles it gives more of an essense of real life than graphics do. Sounds in games range from theme music to speech to background noises as the channels and quality increases the realism will only get sharper, deeper and more believable.
These days many composers dedicate themselfs strictly to games and i have met one of them in person at a show hosted every year called 'Video Games Live' which i much recommend as its a great show. The Composer that runs the show is Tommy Tallarico. Hes the most established composer in the world and has worked on hundreds of titles spanning around 18 years from prince of persia to lesser titles such as pacman world.
There is one sound from a video game that always comes into my mind as being literally music to my ears and that is the satisfying little tune played on the broken sword titles when you get the puzzle right ahh reminds me of many frustrating hours at the same time though.