A bitstream is literally a 'stream of bits' - a sequence of one bit after another (serial).
PCM is the lowest common denominator in digital audio. It is a sequence of numbers that represent the amplitude of an analog signal at points in time (example: 44,100 16 bit numbers for every second of audio of each channel on a CD). PCM is a bitstream too.
In the context of receivers and dvd players, the Bitstream setting means 'don't touch it' whereas PCM means 'convert it to PCM'. To follow up on avaserfi's example, if you have Dolby Digital on a disc and these settings in the player:
- Bitstream: The player will just read the bits off the disc and transport them through the digital output to the receiver. The receiver will identify what the bits mean, decode them, and then convert to analog and amplify.
- PCM: The player will decode the bits and convert them to PCM. The receiver will just do the conversion to analog and amplify.
- PCM, but using analog connections to a receiver: The player will decode the bits and convert them to PCM AND do the digital to analog conversion. The receiver gets the analog signal and just amplifies it.