Call them. They never respond to emails.
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I have the same B&K AVR 507 and am also interested in an upgrade for HDMI and all the current Dolby codecs. I called B&K this morning but was put through to Customer Service's voicemail. I'm waiting on a call back.
I just got a Blu-ray player last night and discovered that when I hook it up to my 507 using the player's ditigal optical out connection I only get 2 channel audio!!! With my older DVD player, I got 7.1 DD.
I have B&W speakers so letting four of them plus the sub go unused when watching a movie is not acceptable.
I just got off the phone with the B&K guy. There is no upgrade available for the 507. He told me he could give me a $1000.00 trade-in value for my unit against list price B&K replacement gear. Ouch! My wallet's a little slim after the purchase of my new LED TV and Blu-ray player purchase last night.
Norma s., I went through the same "learning curve" while setting up my neighbor's HDMI-equipped DVD player. His Yamaha receiver won't handle the audio signal from HDMI so we connected an optical digital cable instead for sound.
At first his receiver kept locking on to "PCM" two-channel mode even on 5.1 movies. After some head-scratching I finally figured it out. What I found was that in order to get multichannel sound from the new player via the optical output you have to go into the player's setup menu and turn the HDMI audio to "off". Yours, like his, is probably set to "on" as the factory default.
After you turn the HDMI audio off, this should bring up a menu for the optical digital output which you can set to output "all formats" (meaning Dolby Digital/DTS surround).
This won't be the newer True-HD or DTS-Master Audio but at least you will have surround sound. You would need a player with internal decoding and 5.1 or 7.1 analog outs to get the newest formats into your B&K receiver.