Spatial audio systems are finding more and more applications for games, teleconferencing, virtual reality, and mobile computing. This paper presents the physical and psychoacoustic principles of these systems. The propagation, reflection, diffraction, and scattering of sound waves produce the physical information used for spatial hearing. The major psychoacoustic cues for azimuth, elevation, and range are described, and the paper shows how these cues are captured by the so-called Head-Related Transfer Function (HRTF). The pros and cons of multichannel and HRTF-based spatial audio systems are presented, giving the designer a scientific basis for making the necessary tradeoffs.