Quoth Wikipedia:

3D audio effects are a group of sound effects that manipulate the image produced by stereo speakers, surround-sound speakers, speaker-arrays, or headphones. This frequently involves the virtual placement of sound sources anywhere in 3 dimensional space, including behind, above or below the listener.
There are several types of 3D audio effects:
Those that only widen the stereo image by modifying phase information.
Those that can place sounds outside the stereo basis.
Those that include a complete 3D simulation.