Seems pretty simple to me. Your toslink switch is bad. You said it works if you plug the PS3 into the receiver directly, but when you try and go through that switch, it doesn't work. So I don't care if there's some LED lighting up saying it's working, clearly it's not.
But HDMI is basically video and digital audio, so long term you'll want to get a new receiver that does HDMI passthrough. Then you don't need to worry about things, it's all just one cable.
I have just recently changed some connections on my system and could use some help. I have my PS3 and DVD on HDMI switch to the TV, that works. I have my DVD and PS3 on digital optical splitter, that does not work. Here is what I have tried. I have plugged the PS3 directly into the surround, it works. I have plugged the ps3 into the splitter alone and seen LED light out the other end to the surround, that doesn't work. I have switched cables, switched which side the cable is connected on the switch, both nothing. I have changed settings on the PS3, nothing. I have tried everything I can think of. The only reason I can come up with is there is a problem with the PS3 sending signal to the surround through the splitter, but I can not explain why. There is, nor should, there be any reason why it does not work. PLEASE any assistance would be greatly appreciated.