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It stands for Advanced Audio Coding and it offers better compression and better sound quality than MP3. Like MP3 , it is a form of lossy compression. This means that certain freqencies of sound are eliminated during the encoding process. But don't worry too much about this. AAC encoding is generally regarded as producing very good results.

AAC supports wide range of sampling rates (8 to 96kHz), 48 audio channels, 15 auxillary low-frequency enhancement channel and up to 15 embedded data streams. The format supports bit-rates from 8kbps to 320kbps.

MPEG-2 AAC evolved out of a search for an efficient coding method for surround sound signals. a2b music and Liquid Audio are delivery systems based on AAC. Widespread use of AAC, similar to that of MP3, is not anticipated due to high licensing costs which make software development an expensive prospect.

Sources:

Fraunhofer IIS-A
http://www.iis.fhg.de/amm/index.html

MP3 Explained
http://www.hitsquad.com/smm/news/9903_109/

MP3Handbook.com
http://www.MP3Handbook.com/

AAC links on MP3M
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