"Captaincapitalism"?? Nice moniker. I'd suggest you throw it away and buy a new one.
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I have a HTS 7.1 (setup is probably the same). If its not a setting on the dvd player, I would check your defaults for each source/input. For the dvd player make sure you have gone with digital not analog (none selected). Then check the default mode...dvd...if the default is DPII it won't permit a higher mode. If its set for DD, DD THX, DD THX Movies it will select that if available....it will only select a lower mode (such as DP) if the disc doesn't have DD. Hope this helps.
If not, give Krell a call. They should be able to walk you through it.
I dont have a Krell Showcase but I will take stab at this anyway =). It sounds like the Krell Showcase is only "seeing" either a PCM signal or analog signal.
In the Krells setup, do you have the input type selected as "digital" on the input assigned to the DVD player??
Do you have a digital cable from the DVDs "digital out" to the "digital in" on the Krell?