I've been experimenting with this a little and the best I've been able to come up with is to use Creative's wrap_oal.dll in place of DefOpenAL32.dll in KF's System folder -- Rename the DefOpenAL32.dll file in KF's System folder to something else, then copy Creative's wrap_oal.dll over to KF's System folder and rename it to DefOpenAL32.dll. This still isn't producing the same sound quality as leaving everything as is, but just unticking System Driver...but the positional audio seems to be a little better. A lot better, actually. This is somewhat upgrading the OpenAL library that KF uses from 22.214.171.124 to 126.96.36.199(assuming you have the latest OpenAL installed). Not completely, though, because although the positional audio is much better the sound quality is still the "System Driver" quality sound.
Alternatively, you can copy OpenAL32.dll, wrap_oal.dll(renamed to DefOpenAL32.dll) and ct_oal.dll from your Windows System32 or SYSWOW64 folder to KF's System folder and get that "unticked System Driver" quality sound(while leaving System Driver ticked), but you BSOD after a while the same way.
Also, while I was experimenting with this and increasing the Channels setting, I found that I couldn't use any more than 32 channels while System Driver was unticked or I'd experience some "scratching" sounds whenever I'd move the mouse(my X-Fi supports 128 channels). Pretty weird. But ticking System Driver and upping channels to 128 produced no scratching at all.
This boils down to a problem with OpenAL. Auzentech recently released an update for OpenAL that addresses the problem, but it won't work with Creative cards. And I've tried lots of different combinations of settings and DLLs, all with the same ctaud2k.sys BSOD after a certain amount of time. I've come to the conclusion that we can't solve this BSOD no matter what. Only Creative can fix this BSOD for us.
Anyway, try that first thing I mentioned where you replace the DefOpenAL32.dll with the wrap_oal.dll. Let me know if you can tell a difference. I'm pretty sure I can, but maybe it's just placebo after so much experimenting.