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0e1f616
(Get the code!)
I got some help from the forums and solved this problem. Here is what I did:
1. First "alsamixer" showed device called Pulseaudio instead my SB Audigy but "alsamixer -c 0" brought up SB Audigy. People who had working sound told that "alsamixer" also should show SB Audigy instead of Pulseaudio.
2. Then I deleted .pulse* and .asound* files and after reboot "alsamixer" showed SB Audigy.
3. At this point unmuting everything from "alsamixer" enabled sound again. I'm not sure which setting had the desired effect but now it works.
I have the same problem with Beta Live CD so Karmic sets wrong default values and you need to fix it from alsamixer because I had everything enabled from Preferences -> Sound.