The chaps over at Hardware Secrets have published an article about how on-board audio works. Here's an excerpt:

The minimum number of channels you will find today is six, also known as 5.1. This is the same audio standard used by DVDs. Here we have two front speakers, two rear speakers, once center speaker (mainly used for voice; for example, on news broadcast or on a movie when the characters are talking the sound will come from this speaker) and one subwoofer channel – also known as LFE (Low Frequency Effects) –, which is in charge of creating a more realistic experience by reinforcing low frequency (bass) sounds.

Eight-channel audio, also known as 7.1, provides the same specs of 5.1 audio, but adding two more speakers between the front speaker and the rear speaker, one at each side (left and right). These speakers are also known as middle speakers. This is the same standard used by high-def discs, i.e. HD-DVD and Blu-Ray.

And finally the latest addition is the 10-channel audio, which is a misnomer, as it doesn't add two more channels to the surround system but provides two independent channels (left and right) for headphones. This system is better described as 8+2. On all other systems the headphone jack located on the frontal panel of the case is connected in parallel with the line out (front speakers) output and thus provides the exact same sound that is being sent to the front speakers. On the 8+2 system the frontal headphone jack is independent from the front speakers output and programs can send a different audio signal to the headphones while playing another sound on the frontal speakers. Think of games that use VoIP technology like Battlefield, where users can talk to each other thru a headphone/microphone set, and you will quickly see the benefits of this system: users won't listen on the headphone the sounds of the game like explosions and gunshots, only their conversation with other users, while keeping the game sounds playing at the same time on all speakers.