PCM is uncompressed digital sound It's the most compatible format, but over an optical or coaxial connection, only carries two channels of audio (left and right). If your source is music, that is fine cause most music is recorded in two channels. When your HTIB gets PCM, it will likely use Dolby Pro Logic to 'matrix' it into pseudo-5.1
Alternatively, there is a number of codecs (Dolby, DTS) which allow more than two discrete channels carried over optical or coax. Upon getting audio in Dolby Digital 5.1 format, your HTIB will decode it into six discrete channels (front left & right, center, surround left & right, sub) and send each channel to its proper speaker. If you have a movie with a 5.1 soundtrack, this will be the most accurate playback option.
Gotta say, this 'digital input' setting is weird. Most devices are quite capable of recognizing what type of signal they are getting, and handle it accordingly. Definitely the case with my AVR. The 'PCM vs original' setting is usually found on 'digital output', in case you are sending your audio to a device that can't handle encoded formats.