SPDIF In/Out Limitation using Realtek ALC850 chipset on a GA-K8NXP-SLI Gigabyte Motherboard:

It seems that the ALC850 implementation on the GA-K8NXP-SLI is LIMITED to two functions:
1. It can receive AC3 or digital audio via it's SPDIF_IN port and output that DIGITAL audio via the SPDIF_OUT port provided that you set your options to pass-through mode.

2. It can receive PCM (non-digital) audio signals via it's SPDIF_IN port and output that PCM audio signal out through it's analog speakers and subsequently record that signal. In this case no digital to analog conversion is necessary and pass-through mode should be disabled.

NOTE: IT CANNOT CONVERT DIGITAL SPDIF_IN SIGNAL TO ANALOG OUTPUT.
Subsequently, you cannot record the digital audio spdif_in signal.

Check to make sure your pass-through option is selected if you are only using your SPDIF_IN to SPDIF_OUT. Uncheck the "pass-through" option if you want the SPDIF_IN audio to go through your analog speakers or to record, just make sure that that audio signal is PCM and not digital.

I tried using NERO 7 and still had the same problem. Any suggestions?