Choppy Audio, only when playing 1080p

I suspect that I need to upgrade a PC component get the best out of my HTPC. Particularly to fix a sound problem which I think is caused by a below spec component.... I'm just not sure which one.

I had an Athlon X2 64 3800+, 2GB RAM, GeForce 6600GT GPU and the motherboard which provides on-board optical audio out to my sound receiver is an ASUS A8N-E. I upgraded the video card to a GT520, but the problem is still there.

I can play 720p with optical 5.1 sound perfectly. Playing 1080p video (I have tested quite a few), only plays smoothly if I set the audio to stereo. As soon as I set it to 5.1 optical, the audio cuts in and out continuously about every 1/2 second.

Any suggestions which component is causing the problem? I'd hate to go through more unnecessary expense and frustration of upgrading the wrong one. Keep in mind that the audio is coming from the motherboard via optical out. I think the on-board audio is Realtek AC97.

Bump.....

I did a clean windows install with XBMC 10.1 Same problem.

Any suggestions anyone? Should I post in the software forum?