After the second time running the auto setup, I managed to get the Audyssey settings to stick. Now I can confirm that Audyssey MultEQ XT is only available with digital sources. It does not kick in for external analog inputs (e.g., SACD).
Now that the Audyssey problem is out of the way, I am having difficulties with Dolby Digital material. Watching a DVD movie or a TV show encoded with DD 5.1 (and input via optical in), the music passages sound awesome. Dialog, on the other hand, is terrible. All dialog appears to come from the center speaker, and it's very muddy as if the actors are all calling out from inside a deep well. The dialog level is OK, so I don't think the problem is the DD dialog normalization. The difference between dialog and non-dialog on the same soundtrack is startling. Turning Audyssey processing off and going with Flat or Front settings do not make a difference. Using Denon's proprietary DSP modes instead (such as Widescreen) did not make a difference. Last night, I resorted to watching DD 5.1 material using the 5-channel stereo mode, which kills the discrete surround channels but at least makes dialog tolerable.
My previous receiver was a Sony DA30ES, which had pretty decent DD 5.1 processing. With the 3806, I am currently at a loss. Any advice will be appreciated.