Here’s an oldie but a goodie I brought over from the HTPCnews days, it’s still relevant today because of the limitations of S/PDIF and the high resolution audio tracks found on the next generation formats (Blu-ray/HD DVD). So with that in mind there are some quick changes to modernize the information.

What is S/PDIF?
S/PDIF stands for Sony/Philips Digital Interface. It is a is a standard form of audio transport, S/PDIF allows the transfer of audio from the source to another piece of equipment while preserving the full quality of the audio signal. The alternative, transmitting analog and then converting back to digital at the receiver, could degrade signal quality.

S/PDIF has its roots in DAT (digital audio tape). A method of digital audio transport very similar to S/PDIF was used in recording studios. It carried the raw 2-channel stereo audio (PCM) for CD mastering.

The consumer friendly S/PDIF was born for use with Audio CD players as a way to send the digital PCM stereo in a pure digital state to a high-end stereo setup.

Later on manufacturers found that they could send more then 2-channels if they sent a compressed stream of audio, like Dolby Digital (AC3), down the S/PDIF connection. To a device it appears as if it is just passing PCM audio, but to a receiver at the other end that has Dolby Digital technology it will detect the compressed bitstream and start decoding it into multi-channel surround sound information. Later the DTS format was added as an optional format that could be sent. This is called "S/PDIF Passthrough" or "Bitstreaming."

What physical forms does one find S/PDIF?
There are two phyical layer standards for S/PDIF: Coax (75ohm RCA) and Optical (TOSlink). Many sound cards have a mini-jack on the back that does multiple functions including digital output. These are essentially coax S/PDIF connectors in mini-jack format. Quite often all that is needed is a mono mini-jack to RCA adapter to use it with a receiver.

What are the benefits of using S/PDIF?
Using S/PDIF has three main benefits:
1. You get a pure digital connection from your PC to your home theater surround sound receiver.
2. You can send the surround sound from HDTV and DVD (i.e.: Dolby Digital (AC3) and DTS) straight to your home theater surround sound receiver. No software decoding needed.
3. Your receiver has much better electrical components, DACs, etc. than a typical sound card. So it is in your interest to hand off the audio to your home theater.

What are the limitations of using S/PDIF?
Typically sound out the S/PDIF for anything that is not pre-encoded in AC3/DTS will not be multi-channel. Any other type of audio will be a raw 2-channel PCM output. This means that 3D sound from games (EAX, DS3D), 5.1 sound from WMV-HD files, any advanced audio formats [such as Dolby TrueHD] or multi-channel (5.1/7.1) LPCM sound tracks from Blu-ray/HD DVD discs will all be downsampled to stereo when sent via S/PDIF.

What can I do about the limitation?

There are a few ways to deal with the limitation:

The first method is just fine for handling gaming and other miscellaneous audio formats that aren’t in need of super high resolution output — 

Dolby Labs has a real-time encoding technique that can take common audio formats, including 3D sound from games, and encode into a Dolby Digital signal. This technology is known as a "Dolby Digital Live". This ability can be found in either a discrete sound card or in select motherboard audio chipsets.

The software implimentation of Dolby Digital Live is available with select Intel branded motherboards as part of Intel’s Dolby Control Center suite. There are quite a few stand alone sound cards with Dolby Digital Live these include AuzenTech’s product line, Diamond XS71DDL, ASUS Xonar family, HT Omega Claro and Striker, Razer Barracuda, bluegears b-Enspirer 7.1, and a few others.

Not to be out done DTS now has their own take on real-time encoding called "DTS Interactive", part of the "DTS Connect" suite of technologies. AuzenTech, the same people who brought us the first Dolby Digital Live sound card that addd DTS Interactive support called the X-Plosion 7.1 DTS Connect, also the ASUS Xonar D2, HT Omega Claro and Striker, bluegears b-Enspirer 7.1. Also the Gigabyte GA-MA78GM-S2H AMD 780G motherboard includes supports for DTS Connect.

The second method is more versatile and future proof, which is to switch to HDMI for your sound input and to invest in a new motherboard or video card that can properly pass 8-channel (7.1) LPCM over HDMI. These are rare but coming. Intel’s G35 and G45 IGPs can do it, so can NVIDIA’s GeForce 8200 IGP. For discrete add-in graphics cards AMD/ATI’s Radeon HD 4000 series also has a proper 8-channel implementation. To date none of NVIDIA’s add-in cards support full HDMI audio, they simply passthrough S/PDIF to HDMI.