In reply to:

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it's as I'd expect with a digital system: all there or nothing there.

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I'm not quite sure it's as simple as "all there or nothing." As the limits of the optical receiver are approched, i.e. as distance increases and light reaching the receiver diminishes towards the minimum receivable signal and beyond, the likelihood of capturing every bit diminishes as well. You may get something, but it is not necessarily "everything." The more data loss, the greater the chance for audible distortion. AFAIK, there is no error correction in the optical component string. Also, distance most likely makes it more difficult to determine the proper beginning and end of each "0" and "1," giving rise to jitter problems and distortion. I'm sure some variation in distance is tolerated, but I don't think that going out 1-2cm would be a good idea to achieve best sound quality. Anyway, for the car dock, there is no reason I can think of why it can't be made to insert all the way in each and every time.

I was not able to get 1- 2 cm away, but it depends on the intensity of the light source as well as the sensitivity of the receiver end. A focused laser beam, properly modulated, would certainly do the trick.

Stu