sir toslink, the ps3 will not bitstream hidef audio unfortunately, and it will not in the future, because they said it is a hardware issue. so you have to set it to lpcm, but yun nga lang, multichannel (onkyo) or yamaha equivalent to this ang magdi-display sa 663 mo. 
oo nga nabasa ko din sa thread ng AVSforum... pero ok lang
mas maganda talaga sound ng BD compared to DVD! hehehe damang dama mo yung channel separation! mapapalingon ka sa likod eh! hehehe
... from AVSforum thread
PS3 AUDIO SETTINGSFrom the XMB Settings menu there are two drop down menus that you will need to check.
* First there is the "Video Settings" menu ("Video Settings" was called "BD/DVD Settings" with PS3 firmware prior to version 2.50 and includes items related to audio as well as video) which includes a sub-menu for setting the audio output format (with sub-menus for each HDMI and Optical outputs).
* Also from the XMB Settings menu there is a drop down menu for "Sound Settings" and it is here that you select to have the audio output via either HDMI or Optical (one or the other, not both) with sub-menus under each for selecting the specific audio formats to be supported for that type of output.
In most cases: You should set your PS3 to output Bitstream if you are using an optical digital connection (i.e., Toslink) from the PS3 to your Audio/Video Receiver (AVR), and you should set it to LPCM if you using a HDMI connection to an AVR. These are the default settings.
The PS3 will not bitstream advanced audio formats to your AVR (i.e., it can only bitstream basic Dolby Digital and DTS surround audio formats). The PS3 can decode all of the Blu-ray Disc standard and optional audio formats and convert them to multichannel LPCM and pass that to your AVR via HDMI. Thus, to get the full advantage from the superior audio formats offered on BD, as compared to DVD, you must connect your PS3 to an AVR that has HDMI inputs that can accept multichannel LPCM (most AVRs that have HDMI inputs can do this except for a very few low-end models).The PS3 console has three types of audio outputs. The advanced high resolution Dolby, DTS and multi-channel PCM surround audio formats are only fully supported when using the HDMI output. However, if you are willing to live with just a 2-channel output in PCM (rather than the full surround sound formats) the improved fidelity offered by the advanced high resolution audio formats can be provided via the optical digital audio and even the analog audio outputs. Also Standard Dolby and DTS surround formats (as used on DVDs) can be output via the optical (Toslink) digital audio connection in bitstream format. The following table shows what audio format is output for each type of connection for the different audio formats that may be found on BDs, DVD, and SACD (Super Audio CDs).
For those still a bit confused by all the audio stuff here are two links that should help (Originally Posted by chris0).
This one explains the difference between decoding in the player (sending it PCM) or in the receiver (HBR bitstreaming, which the PS3 can't do for the advanced high resolution audio formats.)
http://www.highdefdigest.com/news/show/853The relevant part is about halfway down under "New HD Lossless Audio Formats."
This one explains all the different codecs. It's a long read but a good one.
http://www.highdefdigest.com/news/show/1064
