The Dolby Digital setting is definately better than PCM.
Discreet surround means there are six or seven seperate channels mixed into the programming. In a 5.1, 6.1 or 7.1 system, the .1 is the subwoofer.
In a 5.1 system, there's the (1)front left, (2)center, (3)front right, (4)right rear, (5)left rear, (6)subwoofer.
6.1 system is the same, except that you add a rear center speaker.
7.1 system is the same as 5.1, plus you add (6)left back speaker, and (7)right back speaker. The right rear and left rear speakers in the 5.1 system, become left surround and right surround (basically move up to be side speakers), in the 7.1 system. Each speaker is connected to it's own seperate channel. except the 7th speaker, in 7.1 system. It's matrixed in, since there's no 7.1 sources.
The PCM signal that gets processed, is actually a simulated surround, made from a stereo signal. It's better than nothing, but not as good as real Dolby Digital 5.1/6.1. Watching standard def tv channels,can use the Pro Logic setting, and sound pretty good sometimes.
Good luck!