Z-24, this is how it works...
1.) It will automatically send the same signal to two seperate devices from one source.
or
2.) It will send the signal from two different sources to one device.
This should be fine for most applications... the only problem I can see is that if you try and simultaneously send signals from two sources into one device using this adapter you'll get a jumbled mess (ie. a DVD player and a CD player sharing one toslink port on the receiver). The fix for this is to make sure you're only using one device at a time.
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I find that to be a confusing statement. Are you telling him to use a digital connection, or an analog connection for this CD player? He has two digital connections on the receiver (one coaxial, and one optical). So, he could connect both via a digital cable. >>
I think what he's trying to say is that most high end CD Players have superior DACs compared to the ones in mainstream A/V receivers, and this is usually correct. If you have a really nice CDP then it's best to use quality RCA jacks... Whereas, you're probably only going to use your DVD player for HT (which doesn't need to be as full and rich, just accurate).
I, on the other hand, am very cheap

and prefer to buy a nice A/V receiver and use it's DACs exclusively (via toslink or coax) and purchase cheap peripherals. Some would rather do the opposite... but it's really all about preference.
And YES, optical and coax are identical in sound quality. Don't get snookered into buying expensive toslink and DA cables, $20 for a good quality cable is sufficient.
MCM has some nice toslink cables for cheap, check out part # 24-4420. If you want to spruce up your HT a bit (Colors!) you can also try 24-4390, 24-4360, and 24-4375.