The PCM indicator, like Dolby or DTS, is letting you know which signal is coming in. So that's the source signal. If you have a Dolby signal available from the TV or the source, you can change that at the source, and then that indicator will change accordingly.
Just purchased this unit after reading reviews was a bit skeptical, but I like the looks and anything is better than the TV (Samsung LN55B650) itself. Thankfully, I have not had the subwoofer problems noted in other reviews, but I cannot get the system out of PCM. Had the optical cable plugged into TV and it sounds good. Then I switched the optical cable to my DirecTV HD boxes optical cable and it remains in PCM (and the sound quality is worse than when it was direct to the TV). Any advice, or is PCM my only option? I also have a Playstation 3 to work with. HELP!!