Thanks for the detailed reply Listener. You've confirmed my suspicions in a few ways. I have no reference to S/PDIF in any list of playback devices -Windows drivers, in Realtek or in MC. Just speakers and Realtek Digital Output.
So what I have done is delete everything - MC (just to do a new install) Realtek drivers, and USB sound devices in device manager. I then used Revo and CCcleaner to remove all leftover registry entries, rebooted and had no sound devices whatsoever.
I then rebooted with the AudioEngine connected to the USB port and without the Toslink cable. Windows installed its HD drivers. I rebooted, and had system sounds through the D1. (I have no speakers connected through the back panel.)
I then rebooted with the Toslink cable in place, and sound devices list appeared thus:

with these options under Properties for Digital Audio (S/PDIF):

I then installed the Realtek drivers and MC, and rebooted, with this result:

Properties for Speakers 3-AudioEngine D1 appears as:

and for Realtek audio output:

Selecting Speakers/D1 in MC as Audio Output device gives me HD music off my PC, and no system sounds, and no sound whatsoever through MC Connected Media.
If I select Realtek Digital Output in MC as Audio Output device, with it as either Default Device or Default Communication Device in Windows, I get no sound at all. This is while Windows gives this:

But if I play a 192kHz track, I get MC indicating that it is playing the track, and without any modification.
So I have my initial problem: 96kHz sounds through the D1 with or without Toslink cable, but now no system sounds or sounds through browser, popup or otherwise.
But what I can see clearly is MC displaying that 192kHz level is being processed fine. Only when I have Realtek Digital Output in MC as Audio Output device, I get no sound at all.
Realtek digital sound is handling 192kHz, but not connecting to speakers, on a clean install of all sound stuff involved.