Question for the audiophiles on a 2 channel setup for TV and movies..

Ok guys, I have a question that I can't seem to figure out on my own. I know you guys will be able to set me straight.

In a nutshell, I have a 2 channel setup. (Axiom M60's). I had the 5.1 setup but we did some remodeling and have a modern look going now. The 5.1 system made things look a little cluttered. The wife didnt approve and thus I now have a 2 channel setup.

What I have been doing is having my cable STB output Dolby Digital and getting the Dolby Digital signal through 2 channels.

Being more of a videophile and now just getting into the audio side of things, it was always my belief that anything Dolby Digital was just better. lol.

Last night I decided to set the cable STB to output 2 channel only (PCM) and all of the sudden my speakers came to life. Sound is much more clear and real sounding and the surround effects were much better.

One thing I noticed was a little loss in bass when setting the cable box to output 2 channel only as opposed to Dolby Digital. Why is this?

Last part of confusion for me is, I have my cable box and DVD player connected to my reciever via Toslink Optical Audio Cable. Is this the right connection for a 2 channel setup or should I use the analog connection?

Sorry for the long post. Hopefully this all makes sense. Thanks for any help.

My Setup