No, it sounded like you described three different connections: digital audio out from PC into Azur 740C analog-ly into 640R; digital audio out from PC into 640R; and then in your second paragraph, something about the DacMagic. (Which is also where you use the word, "vastly", BTW.) So you didn't actually listen to the DacMagic in either of these scenarios? Actually, that smells right -- I think you mentioned that earlier, and from your other response, I get that second paragraph was based on the email exchange.
And no, it doesn't really surprise me that the Cambridge Audio doesn't redigitize the signal. Good on them. I am kind of surprised that the digital connection is inferior to the analog connection, though.