It has been some time now and still I never got a very good answer to my first question. I sent my question to Onkyo and they sent me this:
Thank You for contacting Onkyo USA Product Support.
We apologize for the delay in responding to your email. Due to the holidays we are experiencing a heavy volume of inquiries. We appreciate your patience and understanding.
The Sony PS3 does not allow for an undecoded Bitstream signal via HDMI to pass to the receiver so the receiver can do the decoding and you see "DTS HD-MASTER AUDIO" displayed on the front of the receiver. The PS3 is doing all of the decoding so if you press the display button for the PS3 you will see it is doing the decoding. The following settings are for the PS3 to output Dolby Digital, and all the other sound formats with an HDMI connection. If they are using optical only do step 1 and make sure in sound settings optical is selected and set the configuration to automatic.
You must go to settings in the cross media bar (start up screen)
Go to the settings bar in on the PS3
Scroll over to settings and go to Video Settings next go to BD audio settings and make sure HDMI and Optical are set to bitstream.
Go to Sound Settings then press the “x” button on the controller.
Click on HDMI then click on manual settings
Make sure Dolby Digital, DTS, and AAC all have check boxes.
Don’t worry about the linear PCM formats leave those alone
Go to the next menu by pressing right on the Directional Pad of the controller and press the “x” button to save the settings.
These setting are for the PS3 to decode sound formats internally through Linear PCM (uncompressed audio however the receiver will not display True HD or DTS Master only multichannel since the PS3 is doing all the decoding)
Go to Video settings press enter.
Go to BD/DVD Audio output settings (HDMI) and make sure HDMI output is set to Linear PCM.
Go to Sound Settings and make sure that HDMI is selected and set it to MANUAL
Make sure that ALL Linear PCM settings have a check mark as well as Dolby Digital 5.1, DTS 5.1 and AAC.
Save your settings
If you have these settings and all linear PCM’s checked please note that you will only be able to get Multichannel and Direct as your listening mode even if the PS3 is set to Bitstream but the PS3 will decode Dolby Digital and DTS on its own PLEASE NOTE THAT WHEN THE PS3 IS SET TO LINEAR PCM IT CAN ONLY DECODE DTS MASTER IN 5.1 EVEN THOUGH THEY SAY IT CAN DO 7.1
Thanks,
Jose
I now have all my settings right and for the first time my Blu-Rays sound like I always knew they should