When I look directly at an NPC and then talk to him, I can't hear him speak.

But, when I look at the empty air to his right and then talk, I can hear him clearly through my left speaker (and vice versa).

I'm using Windows XP with an SB Live and the kX drivers:
http://kxproject.lugosoft.com/

Do you have the same results with the official Sound Blaster Live! drivers?

If that doesn't resolve it another possibility is that you may have selected a speaker configuration in your card's settings that doesn't match your actual speaker layout so it is trying to direct centre audio to a speaker that isn't plugged in.

I've installed the official drivers and the sound works perfectly now. Thank you!
What's even better, the game now runs smoothly.
With he kX drivers, it would run smoothly for a while and then turn into a horrible lag fest.
No idea why sound drivers would have an effect on graphics performance, though.