I'd look at buying a new receiver which would simplify your life considerably.
I just bought the Pioneer VX409S (I think that's it) for $200 at Costco, and it works great. Connections for all sorts of things and Dolby/DTS decoding built-in. Optical and Coax digital inputs (plus inputs for DVD/LD, Tape, VCR, and about five others!). The remote sucks, but the receiver is great. I'm awaiting the arrival of my new Infinity surround speakers so I haven't tried that yet. However, it may not be monetarily feasible for you to run out and buy a new one.
Since your receiver is a few years old, it was likely not built with DVD in mind which might be limiting your enjoyment of DVD in terms of picture and sound quality (not to mention the cabling hassles!). I'm still somewhat of a neophyte at this stuff, but it is quite a pain sometimes to figure out. Though I guess it's about the same for newbies to computer hardware who have no clue how to hook things up. That would be me and audio equipment.
BTW, those optical digital audio cables only run about $20 at Walmart.