I don't really know how to phrase this question, but I'll do my best. How do headphones produce sounds that sound up (above the head) and down (below the head) and all the spaces in between? I know how they make sounds appear left and right, but I swear I hear some sounds above and below others.
What you are referring to is soundstage. The why, is because with accurate sound representation we can trick our brains in to a false perception. The how, is why some engineer is getting paid big bucks to design headphones.
http://www.head-fi.org/t/590377/what-is-soundstage/15