I think what he is talking about is on board video that is on the motherboard. Most motherboards now have capability to do video and sound. Never, ever stick with on board video if your computer is used for gaming. You NEED a dedicated video card. All games need a dedicated video card to run properly. The on board video on any motherboard will not be able to handle any modern game, let alone something as resource hungry as a flight sim.
To be honest mate, if the guy building your rig knows you intend to use it for gaming and he is suggesting on board video, then I'd suggest he has no idea what he is talking about. You might want to shop around with another supplier?
I notice you are from Adelaide, I am in Sydney. Have a look at
www.auspcmarket.com.au as a rough guide (don't worry, i don't work for them!). You can buy the components separately and build it yourself or just get a pre-made system built by them if that is preferable. They have systems on their website that are specifically designed for gaming.
Anyway, have a look and you might have a better idea of what you might want or need. If nothing else, you can get an idea of comparative pricing if you stick with the guy you are using now. In my experience, a lot of computer shops are unfortunately modern day "2nd hand car salesmen" and the fact this guy is suggesting on board video is a concern. There are plenty of other similar online shops around Australia, but I have bought all of my systems and upgrades from them for several years and have always had great service. Like you I have been playing IL2 since day one and have had many upgrades over the years. Anyway, have a good look around, you can never do too much window shopping, our hobby is not always cheap unfortunately.
And as for the original question. Yeah, Win7 64 bit is what I am using too...it is the way to go in my opinion. I use Satiek ruddle, throttle and stick and Track IR with no problems.
Good luck mate.