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Dolby Digital (AC-3) is Dolby's third generation audio coding algorithm. It is a perceptual coding algorithm developed to allow the use of lower data rates with a minimum of perceived degration of sound quality.
AC3 audio is used on pretty much every single retail DVD you will buy. To play back AC3 audio on your computer, you should install the AC3Filters. This will also play back AC3 audio in DivX or XviD files.
Related software tools
AC3Dec is a tool for extracting the AC3 (Dolby Digital) audio from a DVD VOB file.
AC3Filter (Open source)
AC3Filter is an open source AC3 decoding filter that allows you to watch videos with AC3-encoded surround audio.