Another update to this thread.
My brother bought a Vizio 42" 1080P 120Hz LCD to replace the old 26" a few months ago. I also bought a Blu-Ray drive and an external USB enclosure which we use to watch BluRay movies on the computer. It works beautifully, even with it connected to a USB hub (filled with 5 other devices) which is hooked to the end of 50 feet of USB cords.
Last night we got his home theater system all set up with the speakers mounted and the wires hidden behind molding. The TV is connected to the DirectTV HD-DVR receiver via HDMI and to the PC using HDMI and RCA stereo audio. The home theater system (a 3-4 year old Sony HTIB system... pretty basic but it sounds decent and supports DD and DTS 5.1) is connected to the TV's toslink digital out so that anything going into the TV through HDMI will be sent to the receiver.
The problem is getting digital sound from the PC to the TV. The TV only seems to support digital sound input via HDMI. It has no optical or coaxial digital input (just an optical output to go to a receiver).
So far the only thing I can find is a DVI+toslink to HDMI converter box like this:
Is there a better or less expensive way to do this since the 8800GTX apparently can't send audio over HDMI?