I have the elite pro and yes it supposedly has superior DACs but I very much doubt you could tell the difference. The main difference is the external box you get with the Elite Pro, this has loads of connections for guitars, microphones and other bunff. Look at pics of the elite pro in a review or something and you'll see what I mean.
Not sure about the loss of quality, might be related to the connections or the headphones but I doubt it's a limitation of the soundcard. Which headset depends on what you want to use it for, if it's for games, music, and dvds your requirements might be different than someone that just wants to play games.
I'd recommend getting a decent set of music headphones that a normal person would use and people have mentioned good results using the CMS surround features of the X-fi for games. Something like Sennheisers, AKG, Grado or whatever closed or open style. Hopefully someone else who games with them will be able to point you in the right direction.