ATI TV is very basic.. I got a M-audio revolution 7.1 and had problems to have the sound to capture in TV. It looks like ATI use special trick to get the sound in. Then I try to use the onboard sound to capture and the sound card to output it with the digital out of the Revo. No go. Capture drivers need the sound line-in to be on the same card that the out.
I bought Sound Blaster Audigy 2 sound card to see it I cant trick something. ATI had problems with Audigy sound card in the past, as they dont have normal line-in for Input, as my Revo has, but they trick their drivers to have the Audigy to work. So line-in was working that way it was supposed but I lost the digital output. So, I finnaly get rid of ATI stuff, put my revo back and use my onboard to capture and listening to with headphone. What I will try to do is a mixer that will mix my output from my onboard sound to the one from my sound card, so that both output will use the same set of speakers.
I think that it is the same problems that happend with your on-board sound. It dont process the line-in as standard line-in, but the IN sound is sent thru a mixer on the sound processor. It is hard to explain, but check www.rage3d.com. In the forum section, you'll find a thread about the multimedia side on ATI card, and find some help there.
I dont really need TV, only the composite vido-in to capture some taped home movies to have them edited and put back on DVD, so my set-up is good enough for me.
-Always put the blame on you first, then on the hardware !!!