I also have a Yamaha that has this feature, but have not used it yet. As far as Headphones, I bought a pair of Senheiser PX100 for 35 bucks and love them. Keep in mind, I only use them with an MP3 player, but they seem to really do the job.
Back to the Yamaha and compressed files, the Enhancement feature does a great job with my Roku Soundbridge both in 2 and 7 channel modes.