Hey wait, I've got AVI's that are already AC3 encoded. Just random files work fine, it's just my ripped movies (SW:R, AOTC, ROTS, Wall-E, Batman Begins etc) that the audio won't come out while using Sony Vegas. Like I'm getting NOTHING. Guys my final answer is this, if I can't get the audio to work in surround sound with Vegas when it's already encoded, then I'll just convert it to 2.1 and pan it. As I said before, I'll be coming back to redo these when Ady has finished his edits in 1080p or if I can upconvert what I need very well and it will be edited in 7.1. Again, you're still getting the film in 5.1 just not the PERFECT quality sound. It won't be very noticeable.

EDIT: I'm trying MANY alternatives here. I found out that it can BARELY support 5.1 encoded videos so I'll just rip the audio from the video again. Damn this is so annoying. My computer is gonna be ripping and converting for a week, ahahaha