ok, i think people are getting confused with all these new DD and 5.1 buzzwords
	
	
		
		
			Sure, it can be encoded on the fly, but it will still only sound as good as the original stream. 5.1 encoded sound ALWAYS sounds better than real-time DD encoded from a 2.0/2.1 source (which is what you get in most PC games). Also, you'd need hardware capable of real-time DD encoding/upmixing (nForce, XBox), and it still won't sound as good as DD 5.1 that is simply passed through to a DD decoder. Positional sound is much better, and again, so is the LFE (being on a discrete channel rather than crossing over from 2.0). If anything, a pre-encoded AC-3 stream will take up less space than a true 5.1 track, which needs to be encoded and then decoded. And no, my XBox isn't playing pre-recorded sound clips, but it does use pre-encoded AC-3 streams for its DD and isn't simply encoding standard 2.0 stereo.
		
		
	 
oh man, the AC3 sound you get in DVD's sound better, not because it has not been done on the fly but because it has been recorded/enhanced 
in a proffessional sound studio at a cost of sometimes millions
the only real nead for Dolby Dig 5.1 gaming is if you run your pc through a decoder.
people seem to think that DD = quality, this is not true, it all depends on the situation.
standard analog is fine for 5.1 sound, and the only reason that games on the xbox use DD is they are designed to integrate with your 
existing sound hardware.
i really don't see the need for encoding this sound on the fly, then decoding it straight away to be played over the sound system.
encoding on the fly is 
the only way to get DD positional sound in games, you might be able to play AC3 sound clips but they would not be positional.
even if you do use AC3 streams (xbox) the positioning still has to be done on the fly so t will sound like crap.
ask a question about DD sound in games on the 
3D soundsurge forum and read the slew of replies there.