As far as the format you use to encode your cd's to, mp3 at 320kbs or high quality vbr should work fine, nearly as well as flac, and save some hd space.
If your intent is to play music from a computer either form of spdif including toslink fiberoptic or coaxial will yield nearly identical results, depends on what soundcards are available to you. The spdif connection is capable of passing ac3 for as far as I know, and any basic HT reciever should do a good enough job decoding the digital signal unless you are gifted with "THE GOLDEN EARS."
I myself use Winamp for my music media player, though some websites claim there is a level of digital distortian involved with the volume control so the recommendation is to set it to full volume. I have my volume set at 33% and cant say I've ever heard any difference in the sound quality besides not overloading my homebuilt dac, which may be at fault.
If you would like tutorials on using the free program cdex for ripping cd's to lame mp3 or flac, I'm sure I could find the links for you.