Digital output refers to newer devices that do not use regular cables to connect sound. For example, an HDMI cable connected to a TV would use a Digital Out since it is using a high-definition media interface. Using regular gold or silver cables to connect a speaker system into your computer creates what would now be termed an Analog Output.
Some people have experienced problems with the newer Realtek audio drivers deferring to Digital Out as the default output and not detecting the analog connection going into the computer from the speakers.
You would only be able to use Digital Out with a high definition audio system like a home theater system or a set of expensive speakers that use a digital input. In the case that you are having difficulty using the latest drivers, you may want to disable Digital Out in Windows or remove the Realtek drivers from Control Panel -> Programs to alleviate the program altogether.