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MC has a high quality conversion engine, that can be used to transcode from one format to another. To access this tool, select the file(s) you wish to convert the Right Click --> Library Tools --> Convert format to create a list source files. In the Convert Format window you can then: - Convert the files - View the "Details" of the files to be converted and also - Set the "Options" of the conversion. These options include the ability to "Apply DSP" so you have the ability to use all the features of the DSP engine such as Volume Levelling, Equalisation, Sample Rates, Bitdepths, and Channel Up/Down mixing as needed.
When converting Audio Formats you have a wide range of formats to choose from (popular ones include, FLAC, APE, MP3, Uncompressed) as well as the ability to configure the various encoder settings (such as Bitrate, quality etc)
When converting Video Formats you have a predefined set of profiles from which you can choose that covers a wide range of both file types and quality presets.
Extract Audio from Video Files
Optionally when selecting Video Files for conversion, you can check the "Convert video to audio" box and this will then extract the audio track and encode it using the Audio Conversion setting listed above. More information is in this thread 
Use the Converter tool to change media files from one format to another. For example, you can batch convert WAV files to MP3 or Windows Media™ format or vice-versa. You can also use the tool to change the quality level or bit rate of existing MP3 or Windows Media™ files.
Select the tracks you want to convert or select an entire Playlist and do one of the following:
|Right click||Library Tools > Convert Format|
|Menu bar||Tools > Advanced Tools > Convert Format|
The Converter dialog box shows the list of files you have selected and the currently selected conversion format. Click the Change or Options buttons to open the Converter Settings and Encoding Settings. With these settings, you can choose to encode to a different format, select a location for the newly converted file, choose to have both the original and the new file or just the new file in the database, and select to skip over duplicate files.
If you click the Cancel button during a conversion, the current conversion will be canceled and you will be asked if you want to save the results of conversions that are already complete.
NOTE: You can convert any file for which you have an input plug-in installed. The output format can be any form for which you have an encoder plug-in installed.
During a conversion, the Convert Files box shows you the status of the conversion process, as well as its progress. The following are some of the status messages you may see:
|Decoding||The file is being converted from a compressed format to an uncompressed WAV file.|
|Encoding||The file is being converted from a WAV file to whatever compressed format is chosen.|
|Failed…||This is displayed if a failure occurs in either the encoding or decoding process. This could be due to a number of different problems including a bad Media Center installation, low disk space, a corrupt media file, a media file in use by another application, etc.|
|File not found||This mean the disk file for the selected track was not found. The file must have been moved or deleted since it was imported into Media Center.|
|Conversion not needed||You will see this message if your conversion choice is uncompressed WAV file and you choose a WAV file for conversion.|
|Unsupported Conversion||You will see this message if you choose a file for conversion and you don't have an input plug-in installed for it.|
|Complete||This indicates the track was converted successfully.|