Stereo:
Both channels are separate, but if one channel has less activity than the other, more bit rate can be allocated to the most active channel. In theory producing higher quality. To me, I can't hear the difference to dual-channel... next.
Dual-channel:
Each channel is encoded completely independent of the other. So it's like two mono channels. There is no correlation between channels. This is the recommended mode for KVCDs because it produces great audio and great reproduction on dolby prologic receivers. Using stereo can cause problems on some Dolby Prologic receivers.
-kwag
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