It outputs audio thru the HDMI automatically actually. If u have DVD assign to HDMI, then it will process the audio from the HDMI. U might have to set the audio output of the HDMI to PCM. For us over here, I just used the optical output as I was having problems outputting DTS ES, DD EX thru the HDMI.
For the composite saying resolution error, it may have something to do with the DVI, HDMI handshake. On our unit here, I had HDMI from an HD PVR inot the receiver. The receiver is then connected to a Sanyo Z5 projector. The PVR kept saying my pj is not HDCP compliant when it is. I had to go to components for the PVR.
I also recommended this receiver for its single HDMI connection to the pj. So far, its working properly but I feel ur frustration with the stuff I had to go thru setting it up.
Here's a link to a long thread on the 674 at avsforum. Maybe u can get more info there.
http://www.avsforum.com/avs-vb/showthread.php?t=722446