From winamp.com (http://www.winamp.com/news.jhtml?articleid=9182) :
By Mike Darrah
Published March 21, 2002 @ 05:53 PM

Continuing in the PS2 news for the masses, I am pleased to announce that Dolby Laboratories will be introducing Dolby Pro Logic II for the PlayStation 2 at the upcoming 2002 Game Developers Conference (GDC).



So with the Xbox and Gamecube out now in competition to the PS2 this may breath a little more life into Sony's console which is now over a year old...
PS2 games done with Dolby Pro Logic II sound...
Funky ;)

Will it be done with software or is it a chip people need to buy?

Probably like the Gamecube has, some software tools that developers can use which'll encode stuff into Prologic when playing.
Still will need a hardware decoder.