A guy over at the Celestial Heavens forum has put together a set of "premium" or maybe you could call them "enhanced" songs from Clouds of Xeen. He's still working on the Darkside songs.

They sound pretty good, though I still like the originals.

Here's the link:
http://www.celestialheavens.com/forums/viewtopic.php?t=13061

Is this a soundtrack that can be placed somewhere in the game directory to work while playing, or is it just for listening?

I could be wrong, but I'm pretty sure that the game's music is compressed into the .CC files (or whatever they're called) where most of the game data is. Some folks around here have developed game/world editors but I don't know if they have the means yet to replace the music.

So, short answer: just for listening. :^)

Is that even possible? As I understand it, Midi/FM Synth files amount to a sequence of instructions that say, "Play this note with this instrument at this time for this long." I wouldn't think you can massage MP3's into that kind of format.

Some software has attempted to "listen" to music and convert it to Instrument/Note/Instruction (http://www.widisoft.com/index.html) .... I have never tried this, but I am assuming it doesn't work very well.