Having no hands-on experience with the Xonar sound cards (or other C-Media chipset cards), I can't go into specifics with the driver control panel and whatnot, but here's the gist of it:
-The card should be set to Dolby Headphone mode, while Windows' speaker setting for the card should be set to 5.1 or 7.1 speakers, whatever is the highest that Windows will show.
Enabling DH means you set the Xonar to give you headphone surround, but the Windows speaker setting is what games look at to decide how to mix their audio; if it's set to stereo, you get DH attempting to process a two-channel stereo signal, and that just doesn't work.
-Older games that utilize DirectSound3D may need GX mode enabled to have their calls wrapped into OpenAL and hardware-accelerated audio to be available in-game. This is important if you want any sort of surround sound in those games. (I don't know the details of how DS3DGX actually functions without hands-on experience, though.)
Hope that helps!