from MAKE Magazine by
Marc de Vinck 
This is a really interesting Arduino project that involves manipulating
stereo sound so it appears to move in a virtual 3-dimensional space.
There is a lot of interesting information in the forum and the code can be found here.
The effect is so sharp, you can tell the difference between
center, ten degrees left of center and ten degrees right of center. I
was so surprised, I thought it might be due to wishful thinking, so I
turned off the stereo volume adjustments... even with just the delay
and no change in the volume between left and right, you can hear the
sound move from side to side. What's even weirder is that if you listen
to just one side, the sound stays the same.
Read more about Manipulating perceived position of sound