I'm having *exactly* the same problem - I found this thread when googling for a solution.
I too have an NForce 2 board (Abit NFS-7 2.0), and have just upgraded from an 8500 to a 9600 (Sapphire Atlantis 256MB non-pro).
The Catalyst 4.1 drivers that XP automatically downloads from windowsupdate.com seem to work fine (apart from not holding the desktop resolution between reboots... it always boots back up into 640x480x32), but as soon as I try to install anything newer (4.2/4.3/4.4) it refuses to change to anything other than 640x480x4 (yes, that's 16 colours, folks)!!
I've run driver cleaners, I've gone through the registry removing ANYTHING remotely ATi-related, but nothing works.
It's interesting that both of us are running ATi on an NForce 2 board... and therefore I suspect that's the cause of the problems. I've tried playing around with the AGP clock rate, aperture, speed (i.e 4x/8x), and fastwrites, but they make no difference.
I should add that as far as Device Manager is concerned, there are no problems with the drivers - they are initialised and working fine. However, ATI's control panel applet pops up an error message on bootup saying something or other about driver initialisation, so clearly all is NOT well.
So I'm stumped, and stuck on 4.1 until a fix is found. I'll try to contact ATi *and* NVidia support to see what they come up with... (or has someone already done that?)