Hi Perc. I'll give you my 2 cents. If I'm wrong then I hope somebody will correct me.

I'll start with your video connections. Unless you are looking to take advantage of any upscaling capabilities then a direct connection to your TV will ensure optimum video quality for your hardware. Having said that, running HDMI from your cable box to your receiver would probably be ok since the broadcasts are not always top notch (as compared to HD DVD, etc.) so any loss in video quality would be negligible. I would also recommend calibrating your TV inputs by way of a calibration disc (DVE or Avia). I have used DVE and it made a huge improvement.

Your questions about lossless audio are more difficult to answer and may involve you doing some research on your own and I will try to point you in the right direction. Let me also add that I am currently researching the newer technologies because I will be upgrading my receiver in the near future.

A toslink cable is incapable of transmitting a lossless audio signal. From what I've read, the jury is still out on the necessity of HDMI 1.3 Currently Blu Ray owners are able to access the lossless audio via PCM but that may change once Blu Ray starts utilizing such features as PIP. At this point I believe the player will decode the audio and pass it to the receiver so HDMI 1.3 and the ability to decode the lossless audio would be a moot point on the receiver.

The same goes for HD DVD. Yes receivers are able to decode the lossless audio codecs (True HD, DTS Master) but the lossless audio isn't accessible unless the HD DVD is authored as basic. Most HD DVDs are authored as advanced. This is what provides things as PIP (picture in picture), fancy directory commentaries and fancy menus to name a few.

Here are a couple of interesting reads. I encourage you to read and come to your own conclusion.

<a href="http://www.avsforum.com/avs-vb/showthread.php?t=789994" target="_blank"> <b>Why You Don't Need HDMI 1.3</b></a>

<a href="http://www.avsforum.com/avs-vb/showthread.php?t=867502&page=1&pp=30" target="_blank"> <b> HDMI 1.1 X 1.3 for new HD AUdio Formats</b></a>