This is as much of a note to myself for future usage as well as for anyone else with the same problem. I finally figured out how to get iTunes to use the optical (S/PDIF) output on my computer to play music on my stereo. I am running Windows Vista 64-bit on a Asus P5K motherboard with built-in optical output. In the past I could only get Windows Media Center to work, but that will only play the MP3’s which is about half of the collection and none of the newer and better music.
To make it work:
Open QuickTime Player
Go to Edit > Preferences > QuickTime Preferences
Select the Audio Tab
Select the “Safe mode (waveOut only)” option and click apply.
Close QuickTime and iTunes and relaunch iTunes.