Just to restate the good information Ajax gave,
'Discrete' encoding means each channel is treated separately. 1 channel, 1 speaker.
'Matrix' processing means that a channel may be played on more than one speaker, or that more than one channel goes on each speaker.
Essentially, there's more 'processing magic' in matrix which is, as I understand it, mostly used to play sound through more speakers than there are channels. I.e. Dolby Pro Logic is a good example of matrix processing, as it takes a 2 channel signal and mixes it for 3 channel output.
Hope this helps- if not, let me know.
Mike
