Hi-FI
If I understand you correctly. You are trying to hook an analog sorce (the 1/8" mini plug from your XM) to an optical in on the receiver... with a toslink optical cable.
This is not possible. The opical cable will no way transfer or hook up to an analog source directly. Optical cables transfer digital information with light pulses. The XM mini plug output does not work in this way. You may be able to jam the end of the optical cable into the 1/8" (miniplug) port in the XM but you are not making a proper connection. (Unless you are using a XM PCR with your computer. The PCR does have an optical output.)
You would need an analog to digital converter between your XM and the Outlaw. to make it work.
You may be best off with the RCA connection. Although, some people have converted their XM Skyfi's to have a digital output but it takes a bit of know-how. Check out
www.xmfan.com Hopefully I'm understanding what you were doing and my reply was of help...