Hi, its the slim 260 gig. Problem solved now, I returned the game to the store where a closer inspection by them showed the disc had been damaged in transit. It wasn't clicked in and arrived lose inside the packaging so it must have been scratched that i couldn't see so they gave me a new copy.
Thanks for everyones help its being played on now, I'll post if their is any other issues.
Sorry to revive a sleeping thread. But I too have been running into this odd audio bug. However I did some digging, and apparently KH1FM does not support 5.1 So i guess you have to change the audio settings to support stereo instead. I think it makes sense since KH originally on the PS2 handled the current audio back then. Guess backwards compatiblity is not an easy feat. Btw I also read that is might have to do with the display settings as well. Although the case says the games supports 1080p. I'm wondering if its 720p instead. I'm gonna do some experimenting when I get home and will report my findings soon.