As far as I know, it works by shifting some frequencies within the soundtrack so that certain sounds (usually higher pitched ones such as birds singing, but also distant shouts, etc) sound as if they are coming from the further extremes within a wider soundstage. You'll also find it used in Windows Media Player.

As Ian said, lots of people don't like it. I have Virtual Dolby on my TV and several Sony surround options on my DVD player. There are many cases where use of these causes distortion, e.g. muffled dialogue, "warped" bass drums, etc. So sometimes I use it, sometimes I don't. You have to experiment, usually you can set different strengths. However, if you have an AV receiver, then you don't need it.

http://www.srslabs.com/ConsumerTechMultichannel.asp

If it's not an AV hi-fi (i.e. only 2 speakers), then I doubt it... but you never know If it is an AV hi-fi, then probably... but you never know - nothing surprises me anymore regarding side effects of cost-cutting