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Hello. I need help choosing between a new sound card that has DTS connect or a whole new surround sound system (max budget=$500)

Last fall I built my first PC for gaming and watching HD videos. My problem has been that I do not get 5.1 surround sound during games.

Here's my setup:

mobo: Gigabyte Z77X-UD5H (onboard audio = ALC898)
cpu; i7 Sandy
gpu: GTX 670

My surround sound setup is a Sony STR-K790. The K790 only has optical and coaxial inputs (no HDMI or analog). In order for it to play 5.1 audio through the SPDIF, the audio must be encoded as DTS or Dolby Digital 5.1. This is not a problem for videos because I can play them through a media player that will automatically encode the audio (potplayer, vlc, wmp, etc.), but it keeps me from enjoying surround sound in video games.

Gigabyte tech support informed me that my motherboard's onboard audio can not use DTS Connect or Dolby Digital Live to encode my audio for my reciever, and that my only option is to buy a sound card that supports those technologies. So now I have to figure out what to do.

My first choice would be to just buy a sound card that has DTS Connect support through SPDIF, but I'm not finding a lot of good, cheap options. I also worry that I may have space issues with the sound card and my GTX 670, especially if I get a second one for SLI in the future.

The other option is to buy a whole new sound system. I have been happy enough with the sound that the K790 gives whenever it is fed a DTS signal, but I would be willing to upgrade if I find the right deal. Then I could pass on the Sony to my dad, who doesn't play games, but could use it for TV and movies. My problem is that I don't know much about speakers or receivers, or what products are out there.

I have this awesome new machine that is crippled because Gigabyte wouldn't pay the licensing fees to Dolby. Help me!
Edited by Cheepnis - 4/6/13 at 8:48pm