Do I need an optical cable for my surround sound? Will it help me in any way? If so how do I hook it up?

Red and White RCA jacks are stereo 2 channel sound, while optical cable can carry 5.1 sound. HDMI cable carries up to 1080P video resolution and 7.1 sound from you blu-ray disc player to the receiver. You should use the following cables from low to high for audio, RCA jacks, coax or optical and HDMI and for video, single RCA jack in yellow, S-video, Component cables and HDMI. Hope this will help you out.

DVD "all-in-one" systems generally will not pass the audio from the HDMI (only video). That is why you lost sound when you disconnected the red & white. Here is a much easier set-up for your situation: Connect all A/V cables to the TV as if you had no surround system. Use the best possible connections (HDMI, Component & optical audio). From the back of the DLP run the optical OUT to the Panasonic Surround Optical IN. Make sure it is set to receive the optical source. Now you don't have to switch inputs so often on the surround... whatever you are watching is in surround, if you don't want it in surround turn it off and you'll still have the TV speakers on. (This method assumes you have an optical OUTPUT on the TV, and an optical INPUT on the Panasonic Surround System).