Actually, it's just regular headphones we're using. 'CMSS 3d Headphone' is the name applied to the feature in the X-Fi driverset that takes whatever signal is being rendered (say, a 7.1 signal) and alters it using
HRTF so that it seems like it's coming from a 7.1 speaker setup when you're only wearing headphones. That is the issue under discussion that isn't currently working; sounds that should sound like they're coming from the front/side/rear channels aren't doing so.
I'm fairly certain that it's not a driver issue because Bioshock is the only OpenAL game (to my knowledge) where this is an issue. As I mentioned above, I've tried this using different drivers under both Windows XP and Vista and various settings in-game.
Also, CMSS 3d Headphone is a
very different thing to CMSS. CMSS (as per your link) upmixes a stereo signal to 5.1 or 7.1 speaker configuration, whereas 3d Headphone does the exact opposite. That was miscommunicated above.
If you'd like to test this, the correct method would be to hook headphones into an X-Fi, setting it to Game Mode, and set it up thusly:
http://img210.imageshack.us/img210/6302/untitledgk6.png
Under these settings, the X-Fi driver is supposed to correctly localize in-game audio for any OpenAL game. As long as the game uses OpenAL, the driver would take care of the rest.