How to improve on the 2 ch in my 5.1 set up?

A classic solution is adding a tube preamp with a HT pass through. You hook it between the Surround Processor Amp and the Surround Amp. I have a Audio Research LS 16 tube preamp between my Sunfire HT processor and amps. The addition smooths out the digital harshness (AKA "glare") of my CD music sources and surprisingly adds a deeper and more realistic soundstage for DVD soundtracks. Many preamps with HT pass through features are available but I recommend a tube version because it's a big enough difference in sound to warrent the effort. Also, this might help your digital source situation (to a small degree) if you stay with the PS3. If you decide not to upgrade the PS3 try a new DAC (again tube) or, as the others suggested, a new digital source. Happy listening.

Add a real two channel preamp that has home-theater bypass and it will make a world of difference (use good interconnects too). I like the PS3 for movies but I remember is sucked when I tried if for music but in all fairness I only messed with it for a few minutes.

I will go with a decent cd player- 2nd hand Cary or Oppo 95 to keep the set up simple and see for any improvement from the 2 channel analogue first before I start adding a tube amp. Why do i need an extra DAC if the D2v already has one internally?

Hope this route should work for me and not having to spend more money!!! Missus has had enough of my constant HT / audio system expansion. All you advices have been very useful and helpful to my decision making process. Thank you!!

Good luck!!! Go with 2nd Cary if you care about sound only...and go with 60 dollar dVD or blu-ray for video...or if you want extremely high quality audio and also blu-ray/video, go with Oppo.