Negative signal-to-noise ratios

I'm reading an awesome technical book at the moment: Bob Katz, Mastering Audio. This guy is a audio master - read it! One thing thats really tripping me at the moment is this part.



We can hear signals below the noise floor? It seems like the LSB (least significant bit) represents the smallest variation in amplitude available digitally, so where is that signal actually coded and stored? My understanding of the explanation (not shown) is that it exists in the time domain as a modulation on the LSB.

Thats some tricksy stuff right there!