Two Channel Dolby Digital ?


My Panasonic DVD recorder records the audio information in 2-channel Dolby Digital but I have the option of outputting the 2-channel signal as either a 2-channel Dolby Digital signal or a PCM signal. What is this player doing, or any other DVD player for that matter, when it outputs a 2-channel Dolby Digital signal as a PCM signal? The PCM signal seems to sound better than the 2-channel Dolby Digital signal as I beleive it should. Is the player using some sort of digital algorithm to replace what was lost in the analog to Dolby Digital compression encoding process?
mchd1