Instructions:
Windows XP: Start menu/ Control panel/ Sound, speech, and audio devices/ Change speaker settings/ Audio/ Advanced/ Speaker setup (select 2.0 or stereo). This will work with the G35 drivers installed.
Windows 7:See instructions below or uninstall your G35 drivers this will default them to stereo, however, to be sure it is stereo go into Control Panel/ Hardware and Sound/ Sound/ right click on the G35 then select configure at the bottom of this window click on Speak configuration then select stereo. After uninstalling run CCleaner to remove the G35's driver fragments.
Via the G35: This may/may not work, there is a switch on the back of the G35 (left ear piece at the back) down is 7.1 up is stereo. Move the button to the "up" position.
FYI: Some people who have followed these instructions are reporting that the in game sound sometimes cuts out, also some have reported that the G35's stereo option doesn't work, if it doesn't please try one of the other options.Good luck

Thanks Arctic for taking the time to try and help
 
Below you will see the option from configure the G35 as you can see, on my system there is no option for 2.0
 

 
If the option was available for Stereo (2.0) it would be listed in the area of the yellow box above like it is for the SB X-Fi below.
 

 
Also I've tried the surround sound switch on the headphones it had no effect at all either starting with it on or off plugging in, in off position and vice verse no apparent difference with as many different combos as I can think of. 
 
 

To validate your conclusion. Uninstalling the software does work to get the headphone working again but the screen shot above was with the drivers uninstalled. To get it to default to stereo I had to run CCleaner registry tool and remove the key below.

WARNING; For those attempting to use the registry cleaner to fix this, always backup before you clean/fix when prompted by CCleaner.


[HKEY_CURRENT_USER\Software\Classes\Local Settings\Software\Microsoft\Windows\Shell\MuiCache]
"C:\\Program Files (x86)\\Logitech\\G35\\G35.exe"="Logitech(c) G35 Headset"


Otherwise plugging it back in after uninstall resulted in what you see above in the first screen with only 7.1 available.


On the flip side, once getting them working in game (Stereo 2.0),  the G35 headset still functioned well/better with Windows 7 Bass Boost and Virtual Surround enabled through the G35 properties appellate. So if you want to enhance the sound a bit it can be done there with no apparent repressions.


However I've grown quit accustom to enjoying the 7.1 surround sound that the Logitech software comes with. If I could switch back and forth from within the G35 appellate or by the surround switch on the headphone that would be a better implementation on their part so this points to a limitation that I think they should correct regardless of not working with this game.


I'll say this I have the Z5500 speaker system (5.1) and the comments, I've seen elsewhere, that the demo only supports stereo only is bogus. The sound field is rich, very active and uniquely directional. If there is an upside to this it is that I've been able to enjoy the Z5500 system with this demo and I have to say kudos to Crytek for an immersive sound field. Plus it is customizable in that if you want to ditch the music for example it can be attenuated along with other parameters like VOIP which I have no idea if it really works.

Looking on the G35 Wiki, it states you can convert stereo (2 channel) to 7.1 -
 
Quoted from Wiki - http://en.wikipedia.org/wiki/Logitech_G35
 
2-channel to 7.1
The Logitech G35 can take Youtube videos, 2-channel game audio, and other stereo sources such as certain music, and convert it naturally to 7.1 using what is called Dolby Pro Logic II. This allows the user to experience a surround sound environment while listening to only stereo sound. Obviously, this does not actually create a real surround sound environment. It basically tricks the brain into thinking that there are multiple locations of where the speakers are. Certain individuals who usually don't go by sound, or rarely use headphones in games from time to time, will have trouble with getting the most of the Logitech G35. It is however possible to train your mind to be much more sensitive to such sound, therefore making it easier for the person to hear the differences in direction of sound.

I good widdit up to the epicness part.