1.MOST, not all of the diagnostic programs will only tell you if there is a problem with software and not hardware...
2. Electronic parts do go bad eventually. ( I found this out once when a bunch of white smoke rolled out of the back of my monitor, and no matter how much I kicked, hit, cried, cussed, etc. it still wouldn't come back on.)
Of course this is expensive advice, but I would try another sound card. Buy it from Circuit City and if that isn't the problem, at least you can get your money back from there with no problems. Either that or you got a bad 1/4-1/8" adapter. Stranger things have happened.
Good luck...
So. If you throw a cat out of a car window, is it considered "kitty litter"?