If you're playing with magnets, solar flares, and EMP pulses then Toslink is probably the way to go. If you like moving your cables around a lot, tying them in knots, or weaving them into nice designs then you should lean towards Coax. For most of us it doesn't matter (unless your equipment only has one type of connection). I tend to use coax because every time I get a video card it comes with a free 6' piece of 75ohm coax with RCA jacks at each end
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SPDIF should be used to get the digital audio stream to the DACs that you want to use. If your soundcard has a pro audio card with better DACs then your receiver then you will probably want to run analog cables from the card to the amp. But for most of us, our receivers will have better DACs then our soundcards, so we want to run digital links.
The data you get out is only as good as the data that is sent in. What kind of amplifier/speaker setup will factor in as well. If the show show you are watching only has a PCM stream, then analog would probably be as good as digital. On the other hand, if you're watching a HD show with an AC3 5.1 stream, you should notice a huge difference between the analog and digital, assuming you have a 5.1 speaker setup.
Note that the way your tuner card handles digital audio changes things too. Ideally a card will support a SPDIF passthrough mode, where the audio stream is just passed directly to the output connector. Some cards may cheat and decode AC3 (or DTS) streams into PCM (which is just uncompressed 2ch audio).
I thought the Theater550 was the first setup that allowed audio data to be passed over the PCI bus?