Well it depends on the implementation, because you could do it the way Dolby Digtal Live and DTS Connect work and do mono, stereo, multi-channel conversions to a PCM DOLBY/DTS feed. So you could do both, it just depends on what they decide to use for the codecs (DDL is Realtek, DTS is CMedia) they are already out there on dedicated add-in cards and MoBos, so there's 4 ways they could do it IMO, either via the direct PCM connection (like the old CD cables), via the PCIeLanes, on the VPU itself (least likely until they are way more powerful than needed) or on the graphics card (only likely for some solutions), and speaking of which...
I have a feeling that this is the 'All new features' for the AIW series that AMD was talking about.
Oh, and PS, Laptops and pre-built media PCs are likely going to provide this functionality first IMO, as their are end-end solutions and it's easier to fit the part for a specific task instead of part things that might be incompatible on their own. Similar to how Sony was the first with a custom GF7300GS with HDMi, likely the same thing will happen for the Audio+Video solutions. But I may have seen a MoBo recently that supports HDMI 1.3 with audio, but I can't remember right now (went out for dinner tonight don't have my A game right now. :twisted: )