Hey SmartBoy16,
I'm not really qualified to answer that kind of request. But as far as I know, DirectX doesn't support MP3s anymore because quartz.dll is replaced with every new incarnation of Windows Media Player/Direct X/DirectShow and that's what SGDK uses to play media. According to what I've read somewhere, Microsoft disabled support for MP3s in DirectX/DirectShow because they don't want developers messing with MP3 proprietary technology (I could be wrong). You could try to rollback that dll, but I doubt it'll do any good. I've tried to find a workaround too, but no luck. As for referencing hq audio from a cd, you can probably alter the .gdp file that is output by the app. Open it with Notepad, find the media section and put something like this: "E:\audiofile.wav" Of course, you won't be able to determine which drive the user has a cd-rom installed in.
To create hq audio, use MediaCoder and convert the MP3 to a hq WMA file. Should be compatible, I tested it.