True 3D positional sound is entirely possible, however, not using the simple effects at your disposal. You need to be well versed in digital signal processing and a sub-field of that called head relational transfer function.
HRTF basically seeks to emulate how sound is transferred through the air and your body, neck, ear lobes and head into your ears (your brain uses these subtle hints in order to position sound in 3-dimensional space). This works because, with headphones, the sound is delivered directly into your auditory canal: skipping any other mediums (such as your head). 5.1/7.1 headphones (which are complete snakeoil) might actually hinder HRTF because they introduce your outer ear into the equation.
Unfortunately HRTF is prohibitively expensive to simulate. For example, I evaluated MyEars and while my machine (Intel Core2 Extreme) could cope with with the samples running alone (and yes, it was extremely convincing) I couldn't use it in games. Mid-range sound cards (such as Creative X-Fi's) have HRTF processors and this will give you true 3D positional sound in games that support it (DirectSound in Windows 7 dropped support for hardware acceleration, so you will need to use OpenAL).
For a good example of what HRTF can actually achieve, this recording was done with a modelled head with embedded microphones (it isn't simulated HRTF, it's recorded): once again it will only work with headphones.
If you wish to use 3D positional sound simply use OpenAL - don't bother trying to roll it yourself.
Some more examples (made using simulated HRTF):