Russ,
"While referring to DD and DTS extensively in regards to L7, they never mention that somehow they manage to do what you are suggesting."
I just read the section your quoted from the 'Theory and Design Manual.' Re-read the sentence right about the one you quoted....
"In addition to standard decoding for both Dolby Digital and DTS soudtrack, we also include our proprietary Logic 7 matrix technology to extend the 5.1 standard to seven channels, along with some of the LucasFilm Home THX enhancements."
Extending the 5.1 to 7.1 is the 5.1 Logic 7 modes.
This has been this way since '96, it isn't new. Download the DC-1 owners manual if you prefer.
The quote you provide is refering to the 5.1 2 channel mode.
From the manual you haven't read regarding 5.1 2 channel ...
"Designed for conversion of 5.1 channel Dolby Digital input types to LOGIC7 encoded 2 channel output types.
Allows 5.1 Dolby Digital sources to be listened to through the front left and right channels.
Reproduces the original 5.1 performance through playback of LOGIC7 listening modes.
Recommended for recording purposes."
The discription of 5.1 Logic 7:
"A proprietary Lexicon listening mode.
Design for playback of 5.1 channel Dolby Digital film sources.
Utilizes several techniques to derive seven channels from 5.1 channel input types. With side and rear speakers selected, 5.1 LOGIC7 FILM also increases the perceived length and sense of envelopment of the listening space.
Provides remarkable improvement compared to other decoders.
Recommended for 5.1 channel Dolby Digital film sources, even when only one pair of surround speakers is selected."
Of course if you still don't believe it read the info about the DC-1s launch from Buzz Goddard at:
http://www.smr-home-theatre.org/Lexicon/index.html
and see the detailed product launch info.
You might also notice that Lexicon was the first company to have DTS-ES and THX Surround EX decoding. That is because they were already doing something more complex with 5.1 Logic 7 so adding those two decoding schemes to the DC-1 was easy.
" Some reprocessing of the signal has to be in place to make it work."
Of course it is processing the signal, that is what a digital signal processor (DSP) does.
Shawn