The Gnome environment uses EsounD, the sound daemon originally written
for the Enlightenment window manager. The actual name of the daemon is esd.
esd will work great with a Sound Blaster Live! card. When you said
"enable sound server startup" you were saying yes to esd, but esd did
not work.
I had this problem too. It was due to file permissions. I think you
have the same problem.
esd wants to talk to the device file /dev/dsp, which is owned by a group
called "audio". One way to fix the problem would be to add read/write
permission for anyone on the file /dev/dsp, but that is not the best way
to fix it. The best way is to add your user name to the "audio" group
in the /etc/group file. (Use the command "man group" for details on the
format of /etc/group.) Once you are a member of the audio group, audio
should work for you. Good luck.