I have this exact same problem on not one system, but two.  The same symptom
is happening under the "Voice" control panel for the "Voice Playback" default
device.  I can set it to the one setting that is listed, but if I hit "OK"
and then come back in, it is empty, just like the MIDI setting Phil mentions
below (which is also occurring on my systems.)  

To add more confusion, if I press the "Test Hardware" button under "Voice",
it shows everything working fine.  (Both mic and playback work.)  Press "OK"
and come back - Voice Playback and MIDI device are blank again, and still no
sounds.  It's as if Windows thinks the selection is invalid when "OK" is
pressed and resets them.

For note, the Kelly's Korner settings didn't help.  (Been through all of the
suggestions there.)   Additionally, the Windows default sound settings appear
fine under the "Sounds" tab.  The "play" button just never becomes active
when they are selected.  So it doesn't appear that the sound files themselves
are affected.  

I'm taken a look for the files Chris mentions below.  Both the library and
README file are present and appear not to have been modified recently.  (Both
systems used to work fine for over 1 1/2 years, making me believe that
perhaps this was caused by an application of some sort.)  

Reinstalling the sound card vendor drivers does not fix the situation.  
Booting from the Windows XP drive looks like it wants to start an entirely
new installation.  These are both active systems which I can't afford to
flush clean.  

Any suggestions would be most appreciated.