Alliedassault - HL2 Demo Problem

OK, I feel like a complete nub because I can't figure this one out. I downloaded and installed the HL2 Demo tonight. I ran it through Steam. The splash screens loaded fine, and the menu screen loaded fine. Howver when I rolled over the menu items, I noticed the sound was skipping and sounded a little distorted. About this time I heard a voice-over that sounded distorted as well. Soooo, I opened up the options menu and changed the following:

1. Speaker setting from 5.1 speakers to headphones.
2. Advanced video settings for Anti Aliasing and Antriscopic Filtering (not sure what numbers exactley; somewhere in the middle)

When I clicked OK, the background music/sound cut out and HL2 did a vid-restart. It took a few seconds. When the menu screen came back up, it looked much better thanks to AA etc. However, I still had no sound. I started the demo.... and realized I still had no sound. So, I shut down HL2 and lo and behold, Windows has no sound. I did a restart, still no sound. I ran dxdiag and turned off hardware acceleration and performed a sound test. Nothing. Each time, I tried the sound, I checked both speakers and headphones. I am sure the speakers are connected and working. I unplugged them and got the familiar popping sound when I did so. I also checked the headphones in my laptop. I've checked the control panel to make sure my audio devices are set correctly.

Here are my system specs:
P4 2.53
ATI 9800 Pro AIW
768MB RD1066
SB Live 5.1

Any ideas? I did quite a bit of standard trouble shooting and I can't figure it out. Maybe HL2 cooked my sound card?