Its apparently a media center issue. It outputs in 5.1 from the dashboard. I just tested media center, and poof 2 channels only. I wonder if this is a feature or a bug. I tested a 5.1 dvd vob renamed to mpg with the same result.
So thats 4 stikes against the media center extender side of things.
1. no divx support despite the fact media center can play it
2. no visualizations on xbox with extender
3. only 2 channel output with mp3, and videos
4. mce is not cheap for the average person.
Well seems to me, less and less reasons to buy a media center edition pc for xbox 360 without an update. So far, I am not all that impressed with the "multimedia features" of the xbox 360 compared with even the basic xbmc.
I do have to say though, MP3s sound AWESOME off the pen drive and streamed over network with the dash player and its visualizations are KICK ASS.