Had this same problem after installing an ATI Radeon graphic card. I did not want to use the new audio on the graphics card but Windows XP properties for the audio device and my old integrated SoundMax audio device indicated that the 'device is working properly' but when I looked deeper that 'drivers were not started'. Volume icon in the system tray was also missing.
Tried many other solutions posted elesewhere including reinstalling the 'PnP software enumerator' System Device and removing /fastdetect from c:\boot.ini - nothing worked until I found this solution:
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1) Start in safe mode (Windows XP users hit F8 when booting and choose safe mode from the menu.)
2)Go to Control Panel > System > Hardware > Device Manager, uninstall all devices listed under Sound. Sound category disappears.
(In safe mode you are able to uninstall devices that cannot be uninstalled in regular mode.)
5) Reboot in normal mode. Windows reports detecting new hardware and installs proper drivers.
6) In Device Manager under Sound, the Microsoft WDM audio compatibility driver appears (it may be disabled.) If you don't see it choose 'view hidden devices' from the View menu.
Right click, to uninstall the Microsoft WDM audio compatibility driver
7) Reboot in normal mode.
8) Go to Control Panel > Sounds and Audio Devices and check the box
volume control icon appears in the task bar. Volume icon returns.
9) Go to the Audio tab and choose your default device from the dropdown. Sound returns
(Repeat this step for other users on your computer.)