One more bit of information about toslink, should you go that route, is to use a glass-based cable. I found this post on audioasylum.com that summarizes the issue much better than I can:

"Early Toslink cables were poorly designed. They used plastic insides that often developed cracks and caused problems for the fiberoptic light. This raised its head as increased jitter in the signal and many heard this effect on the sound. Thus, cheap Toslink (and all Toslink in the end) got the reputation of a poor connector. As time went on, as it always seems to do, Toslink fiberoptic cable was manufactured along the lines of the ST (AT&T) fiber cable. High-End cable companies offered Toslink connectors manufactured with glass on the inside that was more robust and began polishing the ends (the connectors). Voila, better sound for Toslink. As for coax digital cable, the materials and design have just as much an effect as Toslink materials and design. A great deal of the sound depends on how well the interconnected components are grounded. Which is better? Technically, the coax has a higher bandwidth than Toslink and this is a benefit. The ideal coax connection is better than the ideal Toslink connection. But, when do we have ideal when dealing with electricity (or light for that matter). You need to try each in your system and decide for yourself."