>1) Do I need a great card when passing audio straight from an application to the receiver via digital connection? The thinking is that if the receiver is doing all of the decoding, then I just need the cheapest card available which has an optical connection.
No, even motherboard soundcards will do a good job if they are set for "S/PDIF passthrough" - in other words, no decoding is done by the soundcard and all is left to the receiver.
>2) What should I be selecting as an output inside of an application? SPDIF? 5.1 Surround? 5.1 is missing channels, while SPDIF studders, as if something has crashed (the audio is restored once any other selection is made).
If you play a regular dvd (not HD) and choosing S/PDIF results in stutters, there's something not set up correctly or the hardware is faulty. Stuttering is usually an indication that the incoming stream is not in the right format. See this thread about VLC and stuttering with S/PDIF and try the settings:
http://74.125.47.132/search?q=cache:DxKIGQUXIpgJ:forum.videolan.org/viewtopic.php%3Ff%3D14%26t%3D20757%26start%3D0+S/PDIF+setting&hl=en&ct=clnk&cd=9&gl=us>3) Why on my SoundMax card can I use the Digital Coax connection, but not the Optical connection right next to it? There are no options when it comes to the digital outputs; all speaker settings (i.e. 5 speakers, 7 speakers, etc.) comes with the "Anolog outputs only" stipulation. There is no option to force digital output. The only output options I can find come from within the applications - such as VLC and CyberDVD.
There should be no difference between using the coax or optical port. When you use the digital ports, you are not doing any decoding, so you don't have any controls for it. It expects the receiver to handle any settings.
>4) (new question) Is there any way to get true 5.1 surround out of PC games via Optical or Digial Coax connection? Some have suggested that this is only possible via Analog connections... :-\
Only if the game itself outputs through the digital port. DVD player software, as you already have noticed, gives you this control.