Something is wrong. Check your DVD player, Receiver and the cable. They should work. ALso check all the settings on each component and the remote control. You should be fine.
It sounds like you're missing a setting on the DVD player or receiver. On my reciever I have to map the coax or optical input to say "DVD" for example. Otherwise my receiver defaults to using the 2 channel analog input.
I go into a menu on the receiver and tell it that optical is connected to DVD and coax is connected to my CD player. Then, on my DVD player I have to tell it to output the audio via optical..
Hope this helps.. oh and BTW digital output from the DVD player is the way to go!