AC-3 is a high-quality, low-complexity multichannel audio coder created by Dolby Laboratories. By coding a multiplicity of channels as a single file, it is able to operate at lower data rates for a given level of audio quality than an ensemble of equivalent single channel coders.

( Now for the tech head stuff from Dolby.... ) Although AC-3 algorithms are independent of the number of channels coded, current implementations have standardized on the SMPTE-recommended 5.1 channel arrangement: five full bandwidth channels representing Left, Center, Right, Left-Surround, and Right-Surround; plus a limited bandwidth low-frequency Subwoofer channel. AC-3 conveys this channel arrangement with a high degree of transparency at data rates as low as 320Kbps.

AC3 files can contain up to 6 audio channels. AC3 decoding combines all this information into two encoded channels that deliver to each of your ears, via conventional stereo headphones, its own unique sum of direct and reflected sound from each virtual speaker. As a result, the listening sensation is much more natural, with sounds appearing "out-of-head" or in free space.