In brief, binaural recording involves placing a tiny omnidirectional mic in each of your ears or in the ears of a carefully-crafted dummy head. The results can be very impressive, with lifelike stereo images in which the sounds really seem to come from clearly-defined locations. The drawback of binaural stereo is that the effect of realism only works when the listener is using headphones.
The London Sound Survey blog is full of cool posts that should definitely be bookmarked. Is it just me or are some of the coolest sound design people coming from the UK?