i guess i can only have that set to analog, can you explain that setting to me?
The digital setting should only be used if you have the Advanced A/V or HDTV pack hooked up to your Xbox. I have the HDTV pack on my Xbox and I did some tests. For me, changing the setting from digital to analog, made no difference. Both were recognized as Dolby Digital by my receiver.
Are you using an HDTV or Advance A/V pack? Do your receiver/speakers support AC3 and/or DTS?
Audio Output : Select if you wish to use Analog or Digital Output from the XBox. Digital output requires the use of an A / V pack with a digital output (such as the Advanced A / V pack or HDTV pack).Some more reading:
check Dolby Digital (AC3)
and Dolby DTS