If you have a Blu-Ray player, Play a modern movie (most of them have DTS-HD tracks now a days) and hock up the H264 box to the HDMI output. If it works Blu-Ray player should stay on the multi-channel track and audio be heard on the stream. What I am expecting it happen is this:
The h264 box, will have in it's EDID info that only dupports stereo input or DolbyDigital at best and thus, Blu-Ray player will down convert the multi channel track to stereo.
One way or another, the encoder can only produce stereo audio. I am not sure how I would know which device was doing the downconversion. I suppose I could split the signal to my home theater receiver but that is too much trouble

Another side question, have you ever checked the delay? Let's say you hock up both your TV and this box to your source, play the stream on your device while at home and see how far behind the stream is. I need something with 1 sec max.
As I mentioned in the original post, it is about 2 seconds of latency over LAN, with VLC using a 1000 ms input buffer. So 1 second latency would be pretty much impossible because a buffer is absolutely required to stream h264 without hiccups and pauses.