Well I found my problem.
I never get into 5 channel surround mode with my R3, it's always in stereo mode even though I am selecting the SS out of set-up.
I should have been clued in that something with this particular R3 wasn't quite right when the screen saver never changed from the default to the digital clock ....... even though I verified the digital clock was checked marked in set-up.
In any case I did a factory reset and now it's bricked (stays stuck at the language screen).
I'll contact them again tomorrow and see if there is a secrete handshake that I can do with the remote to breath life back into it.
Thanks for the hints Capt.!!
As soon as I figured out how to 'properly' display the screen you referenced on my Onkyo, I could see that 'most' my other devices were working as expected, but the R3 never showed up with anything but 2 channel PCM stereo at 48 Khz. no matter what I selected in the set-up for audio.
In fact by doing what you showed me, I found I didn't have my PS3's audio setup the way I though I did ..... and so it helped me fix that as well.
And also on the plus side, after reading Gary J's success with his Buttkickers, I'm encouraged that I will be able to stay with the R3 ...... once I get a good one.
No biggie, I got it from Amazon a couple of weeks ago (during the $90 special they had) and I'm sure they will replace it need be.