I investigated the neural algorithms by which neurons gain selectivity for interaural level difference in the brainstem of the barn owl (Tyto alba). Differences in the timing and in the level of sounds at the ears are used by this owl to encode, respectively, azimuthal and vertical position of sound sources in space. These two cues are processed in two parallel neural pathways. Below the level of the inferior colliculus, all neurons in the pathway that processes level differences show responses to this cue that are monotonic, and thus not selective for a particular level difference. Only in the inferior colliculus, which contains a map of auditory space, are neurons sharply tuned to specific interaural level differences. How are these response properties generated from those of the nuclei that provide input to the inferior colliculus? I show that the posterior subdivision of the nucleus ventralis lemnisci lateralis (VLVp) projects bilaterally to the lateral shell of the central nucleus of the inferior colliculus, the input stage to the map of auditory space. Both these nuclei are part of the pathway that processes interaural level differences. Manipulations of the responses in VLVp affected the responses to level differences in the inferior colliculus; responses to time differences were unaffected. By systematically increasing or decreasing neural activity in VLVp, I show that the VLVp on each side provides inhibition to the colliculus at large level differences. This results in a peaked response that is tuned to level differences in the inferior colliculus. Some cells in the lateral shell of the inferior colliculus appear to receive direct GABAergic inhibition from VLVp. I suggest that this circuitry and the algorithms it supports are the neural substrates that allow the barn owl to exploit level differences for computation of sound source elevation.