There's hardly a noticeable difference between Toslink and coax. I use Mark Grant coax into my DAC. Best to try and see what you think. As a side note, the Toslink (optical) cable that comes with the Onkyo is pretty good to be honest - no difference between that and a Monster Lightspeed Toslink.
I, like a fair few can't use the Onkyo with my Ipod Touch since the last update (itunes 10.1) as the playback is terrible (pops and hisses). Hopefully IOS 4 upgrade will sort the problems.