Thanks guys I didnt have a manual and I was trying to help a friend set up his system. We will go with the optical although I thought that the audio though the hdmi was a better feed. I guess I just assumed that all hdmi connections would feed both the reciever as well as the monitor.
Yeah, I found it rather dissapointing that the Pioneer VSX-1016 had added HDMI as a feature (pass thru only) and when they came out with a new series (VSX-1017) they decided to just keep it pass-thru. IMO, it's such a waste of good receiver, because other than that major pitfall it's a fantastic receiver.
The audio over HDMI can be better, but not from a source such as regular DVD. Only Blu-ray and HD DVD (it looks to be that the HD DVD train ran out of fuel) have the superior audio that can be utilized over HDMI.
You might want to connect the DVD player directly to the TV with HDMI and use the optical out on the TV to connect to the receiver, keeping cable costs down. If your friend also has an HD set top box connected to the TV via HDMI you can utilize the Toslink output (or Coaxial in rare cases) for both inputs.