Requesting input from iMac users


I have been playing my iTunes library through (into) the main system via a Toslink coming from the headphone jack on the iMac to the input of the Krell HTS 7.1 processor. It sounds good to me, however, a friend is telling me that this is the lowest quality option for playing the music. According to him the headphone jack is putting the music out through a very inexpensive DAC in the iMac thus diminishing the quality out and causing the processor to accept the music via analog, converting to digital and then back out again in analog. A series of distortion causing steps.

I do have a Pop Pulse (never used) that would allow for coming out of the iMac via USB into the Pop Pulse and back out with digital cable (SPDIF) to the processor. Apparently this eliminates some extra DAC conversions. Would this be a better option? How do you do it?
puerto
USB beats out the toslink on the IMac in my setup hands down. That was into a Bel Canto DAC3 at the time I tried the comparison. Using an Empirical Audio Turbo-3 converter now which is pricey but about as good as you can get for USB conversion.

At the end of the day, it depends on how much you want to spend and whether you're happy with the sound you have. USB should win out everytime compared to toslink, but the USB implementation of your DAC (or conversion device ahead of the DAC) is crucial and you generally get what you pay for.

IMacs are nice to in that they respond as well as any other source device to power cord changes and conditioners, but that's a whole other can of worms for people to debate.
@ Leahy

wow great tip! I just scored a m-audio audiophile firewire for $40 on ebay shipped. I cant wait to compare it to my trends. I figure even if its not as good (which I suspect it will actually be better) I can use it at the office for headphones.
Any reaction to I-mac -> Airport Express ->Toslink -> DA section on a CA840c?
This is where I'm heading but maybe I'm heading for trouble? I am in process of putting everything on my confuser in 'Apple Lossless'....
That setup will be prone to jitter unless your CA840 is able to reclock the signal.

Doubtful you'll be happy with the results, but if you already have all the equipment, might as well give it a shot.