"Note:
a) Refer to your Receiver/Amp user manual to select the corresponding audio input.
b) The audio output can not be connected directly to external speakers."
The optical digital output
can be used with the Edirols or it can be used to provide a signal to a receiver which powers speakers.
The active, or self powered, Edirols are actually meant to be used as monitors for audio production, meaning they are supposedly accurate in having a flat frequency response. For most people that means they will represent a very flat sound, relatively lifeless, no sparkle and you will get no bass frequencies at all. I've auditioned them for music production and find them a relatively poor choice for that purpose and believe using them for an entertainment system, like playing movies, would be even worse.
You are MUCH better off buying an inexpensive receiver, any of which will include: Dolby, DTS, etc. surround decoding, an amplifier for powering speakers, a radio receiver and other features. Connect a pair of decent speakers and you will be MUCH happier than using the setup you are describing.
I would definitely shop Craigslist and Ebay for used receivers as you can get really great bargains on receivers that are just a couple of years old and function perfectly well. Having said that, HDMI has not been common on lower end receivers until just a few years back and it might be worthwhile to get a current model that offers that functionality along with the latest sound decoding capability, especially if you want to go with a 5.1+ speaker setup soon.
I just made some recommendations for a musician purchasing a home theater setup on the cheap so I will offer the same advice to you as I offered to her - on a budget, go cheap on the receiver/amp and go as high end on the speakers as possible!
Check it out:
Here is an example of a very good deal on a refurbished Onkyo TX-SR304 receiver for $109.99
AccessoriesForLess Refurb Onkyo TX-SR304
There are any number of good inexpensive speakers, and as many arguments about which of them sounds best, but let me make a suggestion to look at this
great deal at the same vendor:
Mordaunt-Short MS-300 Premiere - $199.99. Use coupon code
MS300SP at checkout.
Mordaunt-Short MS-300 Premiere Home Theater Speaker Package
Here is an Audioholics review of these speakers:
Audioholics review of Mordaunt-Short Avant Premier
Cross them at 100Hz with a subwoofer (and you do need one!) and you're good to go.
Here are a couple of fine 8" subwoofers, again on the cheap at around $100. If your budget permits, do consider 10" or even 12" subwoofers from the same sources -
BIC America V80
BIC America V80 @ Buy.com for $94.99 w/ free shipping
The Speaker Company V-8
TSC ASW-8 for $99.97 shipped free
The Speaker Company also offers a very good complete home theater speaker package, the PLCR161-HT8, for $269.90. I would definitely not put it in the same class as the Mordaunt-Short, but it is quite a deal. Also check out their Clearance listing as they do put some complete systems there once in a while.
HTC PLCR161-HT8 for $269.90 shipped
I know that these numbers exceed your stated budget of $200 for a receiver + speakers, but at that price point you definitely have to explore the used market for equipment and that discussion should go to an audio/video specific forum like AVSforum.com, where you will find thousands of opinions about specific brands and configurations.
AVSForum.com