Does anyone know how this mod works?

http://www.nexusmods.com/oblivion/mods/32128/?

Is it good?

IIRC, it's not a standalone mod. You would require to use Better Music System created by the same author. That being said, it was created long time ago and the author no longer appears to be working on it or maintain it. You are probably better off using Trifle made by ShadeMe. Keep in mind it requires OBSE to work. Hope that helps.

Edit: If you are just looking for EAX affect, just get a descent headset that comes with EAX built in.

I use it with Oblivion EAX beta and Huleed's http://www.gamesas.com/topic/1192376-relz-restoring-surround-sound-and-eax/. I've an EAX capable sound card so I shouldn't need the replacement DLL but I just can't get ALchemy to work...

I like it. You don't need Better Music System just the plugin you link to, the OBSE DLL detailed in its requirements and (maybe) Huleed's dsound.dll.