New to the HTPC thing so this should be an easy question.
I have a SB Audigy 4 sound card with an Radio Shack Phono to 1/8" adapter plugged into the digital i/o port and a digital coaxial cable running from that to the back of my Pioneer receiver. First off, I'm not sure this is the correct adapter so that may be the problem (someone said this plug from Radio Shack would work for 5.1).
I have Creative Mediasource installed and in the Creative audio panel I have the decoder marked as passthrough. When playing a DVD via VLC, the Dolby Digital symbol on my receiver does not light up when the audio output, in VLC, is labeled as 5.1. If I change the audio output in VLC to S32/SPDIF the Dolby Digital symbol on my receiver DOES light up but the sound is horrendously choppy and unlistenable.
So, from what I've told you, do I not have the proper connection (wrong adapter?) or do I possibly have an incorrect setting? Should I spend the money on 3 analog cables and Y connectors or should I just buy a new sound card with a digital (coaxial or optical) output. Any suggestions are appreciated.

Not sure why VLC playback of DD is giving you fits. Do your 2-channel stereo sources play clear? I've used the same sound card with 1/8" minijack to RCA to output 5.1 via coaxial without issue. That connector should work.

It's been a while since I've used VLC but settings should allow for SPDIF passthrough and your Creative control panel set to SPDIF passthrough to let your Pioneer receiver do the work.

I don't think you will need to go the analog route unless you just can't get the SPDIF to work. Your creative card will do a decent job of 5.1 channel analog output but may not sound as good as the receiver processing the digital signal. At any rate you can pick up 3 mini-jack to RCA cables from monoprice if you want to give analog a go.