Drewfrknconductor2 driver headphones with a not shitty soundstage can produce positional effects just fine
http://www.youtube.com/watch?v=IUDTlvagjJA
But that audio was created to sound 3D. The goal of virtual surround is to make what would be regular audio sound like that video does.
game developers could implement it directly into games if they wanted to, which would render this useless. The problem is, they haven't.
That's not how it works for Dolby surround and my G35's. It simulates a 7.1 channel sound system and plays sounds through what ever channels they would play if a true 7.1 setup was present.
The only way audio sources with less channels get up-scaled to 7.1 is if you use Windows's speaker fill enhancement.
You're right, I worded that wrong. If they took just plain stereo sound, there wouldn't be enough information for them to accurately place sound effects. So they take multi channel audio and use special algorithms to convert it to stereo while retaining directional cues.
Well this is not actually entirely true, because it stil applies effects to stereo sources, music for example. Though obviously this just created a larger soundstage (sounds like rubbish imo), it doesn;t actually provide any accurate directional info.