brundlefly
The fact that it only happens with soft synths suggests it's a buffering issue, which is why I thought the Prepare Using buffer increase would fix it. Just to be sure that's not it, you should try values up to 1000.
And you should try your x64 installation just as a test to see if it exhibits the same problem. It's quite possible this is only an issue with the x86 version.
Other than that, and possibly re-installing, I'm not sure what else to suggest. 
Randy Bowser, another very experienced 8.5 user who recently upgraded, is also experiencing some unusual and inexplicable issues with TTS-1 in X3e, so you're not completely alone:
http://forum.cakewalk.com...t-solved-m3024619.aspx
I reverted back to the image file before I installed X3 for the first time when I was using 8.53. I did all the Win updates+optional, updated my video card and motherboard. I saved that as an image file. Then installed 64 bit X3a only not X3e and before I launched it the first time, I saved as image file. I then launched X3a, I declined to migrate preferences. I then loaded the bun file example you have and it's still has the problem sustaining the whole time.
I raised the buffers to 1000 like you suggested - no effect. I have X1 installed as 32 bit, so I opened it and loaded the bun file example and it works just fine - no sustaining problem.
I appreciate all your help and suggestions, but please humor me and try one more thing. Unfortunately my example file isn't that dramatic. When you play it sustaining it doesn't sound horrible, but when you hear it the correct way it simply sounds cleaner, lifting off the sustain pedal.
Try this please. Go to the example file and open the piano roll view and play the sample, then erase all the sus pedal events except the first one and see if you hear the difference. Undo and redo a couple of times and let me know if it's indeed working fine with your X3e.
What I'm hearing is X3 ignoring all the other sus pedal events. Sorry to put you though this. I'm just baffled by this.
Thanks,