Darn... My only guess is that the content is encoded in a lossy format like Dolby Digital or DTS. Since the 0404 can't internally decode those formats like a receiver would, you may be out of luck.
From the official Xbox
site:
Quote:
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Digital Stereo: select this option to fold any Dolby Digital multichannel audio program down to two channels (left/right) for a direct digital connection to an audio receiver. The console will not collapse multichannel DTS (Digital Theater Systems) output to 2-channel DTS.
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They don't mention PCM conversion or "linear PCM" output; it may only output encoded streams.