AC3 (or AC-3) is Dolby Digital's third generation audio codec, which supports up to 5.1 channel surround sound. This means 5 channels of full sound, with an extra channel for sound enhancements; the subwoofer.
It is also known as an ATSC standard, named A52 revision B.
See:
http://www.atsc.org/standards/a52.html
http://en.wikipedia.org/wiki/Dolby_Digital
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