Previously, I used DirectSound and it worked out fantastic. Even on a Windows 8.1 system. The only issue I had was when the "player" approaches a sound located at 0,0,0 - I wanted the volume of the sound to increase based upon it's distance relative to the sound location.

I did some more research and found DirectSound to be depreciated and to use XAudio2. I viewed some tutorials on XAudio2 and got sound playing - however, because it was in a while loop it locked up my editor.

I want more clarification whether or not to use DirectSound even though it's depreciated or continue on with XAudio2? Do modern games still use DirectSound or XAudio2?

If you are starting with one of them, I'd go for xaudio2, because it's the latest available and fully supported. Personally I use FMOD api, works perfect for me, also with 3D/ positional audio.

I'll try out FMOD only because I heard it on a lot of game titles. However, will there be a issue with compiling the FMOD API library in my game engine Dynamic Library?

FMOD was really easy to implemend! I love it! Great suggestion Cozzie!

You're welcome ;)

What version of FMOD you go with? Studio or Ex?