Steinman, what do you know about virtual surround tech like Dolby Headphone?
Hmmm. How to summarize.
Humans don't have 3D hearing. At best they have 2D hearing. The only reason we perceive 3D hearing is because our ear structure alters the sound slightly depending on what direction it's coming from, and our brain processes these minute differences, combines them with other cues (usually visual) and then recreates the 3D sound for you.
There are a number of
audio illusions that show you just how much your brain is tricking you.
When you have multiple speaker surround sound you are attempting to recreate the actual sound in the room that you would have if you were in the environment being simulated by the game or entertainment. Your ears and brain then do the work of decoding the audio and causing you to perceive the environmental sound as 3D.
With virtual surround sound Dolby and others have attempted to reverse engineer the ear and processing your brain does. It then takes the multiple input surround sound, and pushes it through a signal filter which is essentially the reverse of what your ear and brain processing does, so that when your ear and brain do their job you perceive it as though you had received multiple sound sources, when you've really only received two, one for each ear.
This works partly because your ears are isolated in this case - this doesn't work very well without headsets since the sound going into each ear has to be carefully controlled.
Everyone's ears and brains are different though, so it's not a great experience, but by relying on common features (again, see the audio illusions) they can give most people a reasonable facsimile of surround sound with a stereo headset.
I haven't looked into the Dolby tech specifically. It looks like some of them do a little of both - multiple speakers and processing, but not as many speakers as would otherwise be used.