Thank you for the prompt reply !
On PS3 I changed it to bitstream and that fixed the problem. However, I found out something new.
I have comcast digital cable connected via HDMI to the Receiver. Now while I watch TV - I can't change parameters. It allows me to only watch in DolbyPII. Can't switch between movie/music/neo etc.
And lastly, this one is really is a disappointment - The subwoofer sounds like it has no power at all. I have def tech supercube one. I ran the auto-setup a couple of times. But no difference. I changed the gain on the receiver (from 0 to 6) and still it can't seem to peform the way it did with HK !