Assuming your mainboard is MCP-T or Soundstorm equipped (the difference between the two is that the latter conforms to certain output specs dictated by Nvidia. All MCP-T nForce2s are technically capable of digital output if the mainboard makers decide to use this feature. Mainboard will have a COAX/toslink output on the mainboard itself or will include a header connection and an output panel):
1. Open up your NVMixer (the nVidia logo with speakers in your system tray) and check whether or not you have digital output enabled. If not, check the little checkbox for digital output. Also check Dolby Digital Encoding if you're planning to use Dolby Digital decoder with your speakers/ minisystem/ HT/ whatever. If not, uncheck Dolby Digital Encoding, just to be certain that's not causing any issues. Run the speaker test. If that fails:
2. Before you do any driver installations and what not, check whether or not you have your digital connection properly plugged in. It sounds like you do. After you check your cabling, check the speakers again using NVMixer. If all else fails, we may have to get a bit drastic.
3. If all else fails you may have to:
Update your mainboard drivers before doing anything else. This will involve learning how to use System Restore, uninstalling the drivers, and installing the new set. For any and all help of these matters, I'll refer to you to
http://www.nforcershq.com . In particular, their forums are set up to specifically deal with your mainboard's maker and its particular issues. Run NVMixer again (the little nVidia icon) and run the testing after you've enabled digital output.
As a side note, not all SoundStorm boards behave the same. The Shuttle SFF PC (SoundStorm) does transfer trackmarks properly (at least from one report I've read) while my model (MSI n7G-ILSR) does not.
The newest drivers from nVidia includes ASIO support for AC97 codec as well. Just as a thought.