Where does imaging come from?

Dubzilla, what you described above - balance, volume, effects - are all part of audio engineering. However, there is a lot more to audio engineering than just panning, volume and effects. Depth, height, air, etc is heavily dependent on miking/recording technique. This is how the real imaging magic is captured.

Without good miking/recording technique, mastering can only go so far...

For studio albums where each instrument is recorded individually :
a) Imaging is done with a balance control.
b) depth can often be achieved through compression and/or reverb. For example compressing the vocals has the subjective effect of bringing them closer to the plane of the speakers. Less compression pushes sounds to the back of the mix.
Also a sense of depth can be achieved by adding reverb (either natural using a reverberant room) or artificial to the sound ... conversely removal of reverb (via very close mic'ing and a very dead room) brings a sound closer to the front of the mix.

"the studio engineer creates the imaging effect"

I didn't think the engineer did much (creating) on purist recordings like Pope's and Telarc. They set the two good mike's up properly (to capture the imaging) and it went straight to the master (how TWL said). Q sound stuff like Madonna's "Immaculate Collection" and Roger Water's stuff are different. And the mixing processes I don't know (but I won't/can't argue with the other comments here--panning and volume).

No doubt the rooms acoustics for the original recording have a large impact on how things turn out too. The noise floor in the concert hall itself.

Stereo is not just two mono channels with different signal content. Each channel gets out of phase information from the other channel in a way Im sure I cant explain. This gives the illusion of stereo. Maybe someone with some understanding of recording can shine some light here.