Multichannel analog are required for certain formats - specifically DVD-Audio, SACD, Dolby Digital Plus, Dolby TrueHD, and DTS HD. DVD-A and SACD are restricted to analog or a few digital connections (the proprietary connections like DenonLINK and industry standards IEEE-1394 and HDMI). DD Plus, TrueHD, and DTS HD take more bandwidth than SPDIF (coaxial/optical) can offer, and thus can only be passed digitally using HDMI (either as multichannel PCM using HDMI v1.1 or as digital bitstreams using HDMI v1.3) Check out my HDMI FAQ for some of the nasty details. For regular DVD and CD activities, you'll want to stay digital.

The XA2 is likely to upscale much like the other Toshiba players. They've already got a good solution in place, and with HD-DVD being the main purpose I doubt they've invested much in making improvements there. The XA2 does not support DVD-Audio or SACD.