You may need to configure the Xbox 360 to send only stereo (2.0) information over the optical output, if that's possible. I'm not sure if the 0404 USB can accept and/or downmix 5.1 information, which is what the Xbox 360 outputs by default.
Otherwise, from the manual:
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S/PDIF to Analog: Attach a S/PDIF source, power cycle the device, and set direct monitor to “Main”.
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Try that first.
Also, select Optical as the S/PDIF mode.