Virtual Auditory Space
Usually when we listen to external sounds they appear to come from a particular location in space. However, when we listen to sounds over headphones the source appears as if it were inside our head. The most basic difference in the external listening situation is that an incoming sound is transformed by the outer ear before reaching the eardrum. The pinna acts as an acoustic filter, that amplifies or attenuates different frequency components in a way that depends on the direction of incidence of the sound wave.
Virtual auditory space (VAS) technology is based around capturing these head-related transfer functions (HRTFs) such that headphone signals can be modified to give rise to 'spatialised' sounds. VAS is a powerful tool in that enables a listener in the laboratory to be placed any kind of auditory environment imaginable, which can include multiple sounds at multiple locations, sounds that move around the head, artificial reverberation, etc. It is even possible to "listen through someone else's ears".
To create VAS, we place a miniature microphone in the ear canal and record impulse responses for a large number of locations about the subject's head. The HRTFs corresponding to the various locations can be extracted from the impulse responses obtained. When a signal to be delivered over headphones is first filtered with the HRTF, the perception is of an externalised sound located at the original recording position.