The cheapest hi quality audio upgrade to match hi def optical players is to pick up a HDMI 1.0 or 1.1 AVR that accepts LPCM audio.
The PS3 will supply up to 7.1 LPCM audio with a HDMI connection (lossless). However there is some concern that the Silicon Image (Sil 9133) HDMI output driver chip the PS3 uses, is not the right one for HDMI 1.3a advanced audio codec raw bitstream output -- even though the PS3 claims HDMI 1.3. It may never pass raw bitstream -- but LPCM is ok.
If you get the XBOX 360 HD DVD player add on -- then you just need to hook up the Toslink to your existing Yamaha AVR. The new Dolby TrueHD lossless codec gets decoded in the XBOX, mixed with HDi PiP commentary audio and re-encoded with a lossy codec for Toslink output. Your choice to use either 640 kbps DD or 1.5 Mbps dts (the max rates these legacy audio codecs allow). You will get very good quality audio.
The #1 priority to get better sound though, IMHO first, is to get a good subwoofer! You will not go wrong with a SVS sub.
