Depends on what you are connecting to, if an amp that supports hdmi input then use hdmi as that will give you hd digital sound along with video as long ad you connect the amp to the tv via hdmi too, optical cable will give you just regular digital sound and should be used with an amp without hdmi input.
my old amp had hdmi but didn't support audio via hdmi so i plugged the hdmi into the xbox for video then plugged in the component lead for the optical output which i plugged into the amp aswell for audio, no modified leads needed.
i now have a new amp that suppports audio over hdmi so now my xbox, PS3 and skyHD all use just an hdmi into the amp and then there is one hdmi from the amp to the TV for a much simpler setup, whats nice is the amp also upscales all signals to 1080p even analogue so the iPod dock that connects with component also goes through the hdmi.
the amp i have an onkyo tx-sr578 and the one before was a tx-sr506 and they are highly recommend as home cinema amps, expecially for the money.
You don't get proper surround from sky through HDMI though, so your best to use you optical cable for that, then you'll get full surround.
I have the Onkyo TXSR705. Banging amp. Also got a Dennon amp upstairs thats also sweet as. Gotta love these surround amps.
Up-scaling to 1080p doesn't really mean anything though. All that's doing is stretching the native picture to fit a 1080p screen. So, depending on the TV your using, you may be best using the screen to do it.
e.g. The upscaling on a £1000 TV will be better than the upscaling on a £1000 amp, because thats what the TV is supposed to do. Its what its made for. The amps isn't made for this purpose primarily, so it will be worse. It is, afterall, there primarily for the sound.
This obviously depends on your tv though. If your running a Teknica or something, may as well let the amp do the upscaling, but if its a halfway decent tv, (Pioneer, Panasonic, Sony etc...) it'll have the better upscaler anyway. In which case, you want to set the amp to pass through the picture at its native resolution, and let the TV do the upscaling.
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