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If I'm playing a Gamecube game encoded in Dolby Pro LogicII
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nothing can be "encoded" in DPLII, it can only be designed for DPLII. since DPLII is only a processing scheme and not a sound format, your game was designed to take advantage of that scheme.
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am I "losing" the encoded 5 channels
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there are only 2 channels, the rest are simulated. the gamecube is only capable of stereo sound, but if you put your receiver in DPLII mode, you will be taking advantage of what the game designers had in mind. DPLII usually sounds pretty good to me when a game is designed that way. put your receiver in II or IIx mode, and you should be all set.
CJ