Abstract: An improved signal processing algorithm for virtual reproducing 5.1 channel surround sound by headphone is proposed. Firstly, by analyzing current signal processing algorithm, it is pointed out that current algorithms will create unnatural subjective hearing effect. Then, by using the method of HRTF filtering and surround signal decorrelating, the improved algorithm is not only able to eliminate the defect of in-head-localization in headphone reproduction and simulate the subjective effect of multi surround loudspeakers, but also not to induce other new unnatural effect. Therefore, the improved signal processing algorithm can increase envelopment and improve the subjective effect in headphone reproduction.