i have a different receiver than you, but many of the same symptoms. the smell thing i'm not entirely sure about, but if it is a very strong smell and continues to exist, i'd give panasonic a call and ask about it.
the connection problems probably have to do with how the different inputs are configured. on my yamaha you can change what input goes to what source if the default configuration doesn't work for you. look through your manual and see if there is anything you can do to customize the input ports. the inputs on the back should be labeled with what source they default to, so make sure you're inputting to the dvd optical input.
dvds play at lower volumes for me, as well. i've played dvds through my receiver from a number of dvd players as well as a ps2. with the ps2, dvds are softer than games, so i assume that it is just how dvd audio is recorded. i wouldn't worry about it much.
if your receiver says it is in 2 channel mix, then it should only be outputting in 2 channels. my receiver also has the pictures of the different speakers lit up even when they're not all being used (i know this from when i only had the front 3 speakers, as well as i still don't have a subwoofer). i think this just indicates what channels are being received from the input, so a digital signal in DD or DTS or whatever you're using will send signals for all channels, which your receiver then downmixes into stereo. if you really feel like you're missing some audio in your setup, ask panasonic about it when you call them about the smell...
overall, your symptoms sound common and you have nothing to worry about, it's just some quirks in how receivers portray what they are doing.
CMT-340SE2 Mains & Center, CBM-170SE Surrounds, Rythmik F15, Emotiva XMC-1, Emotiva XPA-5