Interesting. That setting didn't work for me, but I went through every one of them before hitting the lowest quality one --16 bit, 32,000 Hz. It seems to work better, but it's still dropping audio sometimes. I'm not really clear on what this setting is for, or whether it would degrade the audio quality coming out of my blu ray rips (DTS-HD) playing through XBMC. Incidentally, I never had any trouble with audio from XBMC, only everything else.
I just noticed that audio isn't totally going away, though. If I crank the volume up to +15 I can actually hear it, although the level is at about what should be -40.
Unfortunately, I live in the middle of nowhere, so if this AVR needs a firmware upgrade, I'll be shipping it.