The true "Direct" mode should bypass all A/D and D/A converters and associated circuits in the receiver, so that it works like a good'n'old pure-analog integrated amp. But many of today's AV receivers don't do that anymore. For example, my Elite 45TX leaves the bass management (done in the digital domain) engaged even in the Direct mode. So, my take is, the availability of the "Direct" mode is often for the marketing purposes only.
Back to BigWill's experience, my first guess would be that the remarkable difference in sound quality was mostly due to difference in room acoustics and speaker placement. Or was it heard under identical conditions with respect to the room and placement?
