I am wanting to know the best way to connect my Ipod to my Denon home receiver so I can listen to my music via home stereo.

My issue is this: I want to be able to listen so that the recvr picks up the digital sound. My Denon recvr is model AVR-1802. I have 1 slot for digital optical that is not being used.

I have seen the Universal Docking station that is available from Apple, but will it pick-up the digital sound or analog only?

Analog only from an iPod. You could get an Airport express & optical cable to stream iTunes music from your computer or better yet an AppleTV which has an optical out.

Denon also makes a series of ipod docks that integrate into their AVR's. The advantages are that the ipod is controlled by the receiver and the docks all feature net connectivity, either wired (eg. ASD-3N (http://www.ca.denon.com/ProductDetails/3346.asp)) or wireless (eg. ASD-3W (http://www.ca.denon.com/ProductDetails/3347.asp)) (allowing you to access internet radio as well as stream music from a PC or server).

That only works with Denon networked AVRs. The 1802 isn't one of them.