Anonymous...
I'm sure your right. I popped in a music CD, and the Lord of the Rings and there was a huge difference. With the equilizer on in CD mode it was painfully bright. The movie sounded fine. I was so excited the sub was working, I didn't even check the CD through the CD and DVD input. I'll give that a shot tonight.
As a side note, this is a cheap DVD player that came with the projector I bought (waiting on something new like a Bravo D2 - but ahven't decided yet). It has optical out, and RCA out - but no Coax. So I can't really test that. I will try it through the Analog inputs.
I think I failed to mention the solution. Once I set DVD and CD to OPT1 for input, I went to the decoder menus and for PCM I set it to PLII, then stereo - the whole mix until I found one I liked. It was set to Auto on one menu, and then Last valid on another. Things are working great - I set the sub crossover to THX (80hz) and couldn't be happier.
NomoSony - I have another Yamaha receiver and this is the first one with on screen setup I've had. I don't know what other receivers are like with this feature, but it makes it so easy the way Onkyo has built the menu's. Very easy to navigate. That and it sounds very clean, I am hearing a lot of detail I didn't know was there.
The old Yamaha was an HTR-5150 (probably about 6 years old now) and as an example - in the DVD Finding Nemo I could not hear the fish fins fluttering and swooshing in the water when they are just sitting there. Clear as day now.