Tuneman,
You can use the USB as an output, but you have to install a third party app to make it work. It isn't a bad deal, though. From what I understand, the third party app was written by a guy that was on Logitech Squeezebox team. The app is call "Enhanced Digital Out" and can be installed directly from the Squeezebox via the internal menu. You just have to enable all third party apps. The little mod also allows the SBT to do 24/192.
EDO also allows you to disable the analogue outs when using digital.
There's also a little app written by the same guy that disables the screen. The screen will come back on with a key press, but will go blank after a set time. When the app kicks in, it completely disables the screen. I was surprised at the difference that disabling the screen made.
I don't use the EDO app, because I have no need for the USB mod. I use a "Toolbox" mod that did improve the quality of the sound for me. If you want to check that out, just do a search for "Toolbox 3.0 Squeezebox Touch."
After applying the mods, I could not tell a difference in sound quality when going with a linear power supply. I just went back to using the wallwart because it's smaller.
As for the sound quality of optical vs. coax, you'll just have to try them both to see what sounds better to you. If you go coax, make sure that your cable is 1.5m long. There are a few threads on the subject. I don't remember the exact reasoning behind it, but can say that going from an 18" cable to a 1.5m cable made a small, but noticeable difference for the better in my system.
I've messed with my SBT quite a bit applying tweaks and such. You can get some good sound quality out of it. I've also found that just about any external DAC of reasonable quality will improve the sound quality versus the internal SBT DAC.