Have you installed the Soundblaster Live! drivers yet? The XP ones might not work very well. You can get them here:
http://us.creative.com/support/downloads/download.asp
If you've installed them already, then I don't know what to tell ya. Time to format! Just kidding.
Formatting seems to be the panacea for all Windows problems, but it can create some annoying new problems as well. Did you plug your headphones into the actual sound card or into the CD-ROM? The CD-ROM doesn't play sound through your sound card; it has its own audio "device." If you plugged it into the sound card and it worked, then that's weird. It would be a really big coincidence, but I'd at least check to see if your speakers actually work. Try a new set if ya can! Good luck!
-Lasereth