Does this convert sound to just 2 channel audio? would I not be able to get surround sound? If this is the case, is it better to get an external sound card?
That's right: the Benchmark DAC1 is two-channel only.
I missed one of the questions in your first post -- yes, most current A/V receivers have DACs built in. Unless you're very interested in the particulars of two-channel audio, a DAC isn't something that you really need to worry about. Current receivers will generally accept three types of signal in order to process audio for movies (as well as audio): 1) S/PDIF digital audio (via optical or digital coax connection -- either way, it's a single cable), 2) HDMI, which is a single cable for both audio (and also includes a video signal, which the others won't), 3) multi-channel analog (in this case, you will have a single RCA cable for each audio signal; so, i fyou're doing 5.1, you would have a total of six cables).
If you are shopping for a receiver, most would probably encourage you to get a unit that accepts an HDMI input (preferably, you'd have multiple inputs), and processes the audio portion of the HDMI signal. HDMI is the latest and greatest thing, and uses lossless codecs for the multi-channel audio for movies (when used with a compatible BluRay player, and a properly encoded BluRay disc). In my opinion, the drawbacks to HDMI are compatibility issues, hardware and firmware processing issues, handshaking issues, and any improvement is slight (IMHO). To handle the HDMI video, you would also have to have the right TV (in general, a digital TV with at least on HDMI input). For some of those reasons, I've chosen to stick with the previous version of audio transmission. If you don't have BluRay (or, less likely, HD-DVD), you won't be able to take advantage of any HDMI lossless signals anyway, because those are the only media that offer True-HD and DTS-MA signals (which are the lossless versions).
The S/PDIF signal is the Dobly Digital/DTS 5.1 (or maybe 6.1 w/ DTS) signal transmitted digitally from a DVD or BluRay player to the receiver. This is a fine solution, and works for many, many people. I've never had a connectivity issue using S/PDIF for movies or music.
The third solution -- multi-channel analog connections -- are for those that generally can't process the digital audio for one reason or another. Perhaps they have a BluRay player that will output multi-channel analog, but their receiver won't. In that case, they can send the audio over several independent analog audio lines. Most people would only use this if they had to; it would be preferable to use one of the digital connections.
In either of those digital transmission cases, the receiver will do the digital to analog conversion (DAC). In the multi-channel analog case, the BluRay player will do the DAC (even though the receiver still has DACs in it, they would just not be used).
For your first HTPC, I would suggest going optical S/PDIF out of your PC to your receiver. It's super cheap to get a sound card that will do optical out. I've been doing this for some time with very fer issues (most problems were with HDMI video). See
this thread for some more detail on the soundcard business.
