yeah that last cable. I got it working now as well.
It seems the necessary stuff I needed came with the xonar card.
Basically my AV cable for the xbox360 did have the right optical out socket already.
I then had 2 plastic adaptor thingies that came with the sound card, these are the TOS adaptors.
I had a cable which was very thing and had plastic things on each end, optical cable. What confused me is I only just realsied these plastic things pull off so the end looks different without them in.
The cable itself plugs straight into the back of the xbox360 cable socket, I then attached one of those adaptors to the other end and then that fits into the spdif in on the soundcard, doesnt click in like a normal jack does but fits.
Now the good news is this does indeed work without the lag and crackles. So I didnt need to buy anything else and now am using optical sound from xbox360 to pc.
Is some minor distortion but overall I would say less than the old line in method, is now stereo seperation whilst before was mono and although I cant apply DSP effects from the soundcard (still working on this) there is defenitly more bass on the music in game etc.
So for others who need to do this I needed an optical cable and a TOS adaptor which came with the soundcard. I already had an advanced AV cable that I paid a premium for in the past tho, my original xbox360 cable doesnt have the optical out socket on it.
pabs the one I got was actually this.
http://cgi.ebay.co.uk/VGA-HD-AV-CABL...item4aaaa54ad0 but mine higher quality microsoft version which was nearer £20 than £2.