Which Nvidia did you get with your laptop? Do you have a bluray player in it as well? I suspect that little part about supported channels - 2, might not allow more than the stereo audio out of the computer.
Sound won't degrade using a toslink unless you are referring to not being able to use the high def audio rather than the usual DD or DTS.
I also noticed you have the laptop hooked up to your tv and not to the Denon. Is this just a temporary setup to test for audio out of the laptop via HDMI? Is the TV set to HDMI 2 which is your laptop input. Are the TV speakers turned off? Why do you have HDMI 3 set up the way you do? Is your TV capable of sending a signal out on HDMI 3 which would then go into the Denon? Or are you attempting to use the ARC portion of HDMi 1.4 spec? The Denon is not capable of using this, it is only HDMI 1.3.
