Computer output to DAC, which route?


I have disbanded my main system because I am using my computer system more and more. I am going to purchase an outboard DAC for my computer, but I want to know something:
My computer comes equipped with COAX and TOSLINK outputs on the motherboard. Should I use one of those or use a DAC with a USB connection? WHat are the pluses and minuses of each way if any? I am using typical Altec Lansing speakers (good for what they are) but will probably move up to active Dynaudio monitors in the future. All music is sourced from itunes in either AAC or apple lossless formats.

Thanks in advance!
phoenix469
Audioengr, thank you, I think that I am seeing how this comes together. Now just have to put a few more dimes aside to put the package together. Going to have more questions as I put this together.
Check out the Soundblaster lineup of outboard soundcards/DACs. They connect to the the PC by USB, most with USB 1.1 and do not require Asio driver. They do stereo, 5.1 and some do 7.1. 24 bit/92 Hz DACs. S/N ratios over 100 dB (cause its outside the internal crap from the PC). List prices range from $50 to over $200. www.soundblaster.com.

I am using the Soundblaster Live!, RCA analog connects into Sherwood 100w x 6.1 receiver, B & W LM1 desk top speakers and small Velodyne sub. I listen mostly to the online radio stations while working on my PC. The nearfield stereo sound is awesome. Almost like headphones.
I actually own an external $50 SoundBlaster X-Fi Surround 5.1, it sounds pretty good, but I suspect that it will sound even better if its optical out is connected to external DAC.

Does anyone have this experience, how good it works?

Actually another question - as the technology is progressing exponentially, do you think that the modern $300 DACs are actually sounding better than old $1000 DACs? Especially taking into account that Blaster output is 24/96.
In my humble opinion going USB DAC is the only quality way.

Several USB DACs are out there. I'd like to suggest a conversation with Larry Moore and trial of his designed and manufactured Ultra Fi iRoc USB DAC... so simple and simply amazing...

especially when coupled to a quality USB cable (YES...vital) such as Ted Denney's Synergistic Research USB cable or Robert Schultz's Poboeima!!! USB cable and of course quality single-ended cables to the preamp.

Dollar for dollar (like a boxer: pound for pound) with a MacMini I have found nothing that compares.The complete transformation of the system this setup is on is nearly confounding. My adult kid just shakes his head in wonder as do several of my friends. This combination is eroding my faith in CDPs regardless of price.

I have no commercial or otherwise interest in the above firms or persons other than being a very pleased and happy customer.

All the best & happy listening,

Ed

.
If you really want to hear PC Audio at it's best, go firewire. I just went to a firewire to spdif converter (M Audio Firewire Solo) and just couldn't believe how good it sounds. There's just no way the power supply in a PC can provide stable, clean power to a soundcard. I was thinking of going USB but thought best to just go with the fire wire.

Enjoy your rig.