The digital out port does one of two things depending on your settings.
1 - Send a digital signal to an external decoder box. Typical example is sending a Dolby Digital (AC3) signal to an external decoder. Digital is a cleaner more pure way of sending audio signals instead of analogue, so if you use an external system (home stereo), this is the way to go.
2 - Send center/subwoofer signal to a 5.1 system (see Cambridge Soundworks stuff). These are the 5th channel (center) and the .1 channel (subwoofer) from DVD's. You need a 5.1 speaker setup that takes analogue signals to use this (ie. Klipsch 5.1 ProMedia). Ones that take a digital signal (ie. Midiland 8200) would use setup #1.
Hope that helps.