Okay, I'm going to try my best to simplify this.
Think of LPCM as the 6 channel analog outputs on your DVD player, in that the DVD player is doing all the decoding and sending discrete audio channels. Its telling the receiver what to output from the front right, front left, rear right, etc.
Using Bitstream is just sending the encoded audio from the disc directly to the reciever to be decoded there. Ergo, the receiver knows that its getting a DD, DTS, TrueHD, etc stream and decodes it accordingly.
At present, the PS3 is incapable of Bitstreaming HD audio codecs. It can not send them to the receiver in their TrueHD, DTS-MA containers. But, it can decode them and send them via LPCM as 6 or 8 (depending on the movie) discrete channels. So, if you have your PS3 set for LPCM and its hooked up to a receiver capable of playing a PCM stream via HDMI you will be getting HD audio. The TrueHD and DTS-MA lights on the receiver won't come on, but you can verify which audio stream is playing by pressing "select" on the PS3 controller. It will show which audio codec is being used.
The clencher is that the PS3 MUST be connected via HDMI. You can send a 2.0 PCM stream via optical, but you're only getting 2 channels of audio. There's a few reasons for this. 1) Optical doesn't have the bandwidth to transmit HD audio. 2) DRM doesn't allow it. For DRM purposes, digtal HD audio can only be transmitted via HDMI by HDCP compliant devices.
For those of you saying that Bitstream or PCM sound better, check your receiver. Different receivers handle Bitstream vs PCM differently. Some allow additional processing of Bitstream, but will leave a PCM stream alone. For some its the other way around. My Denon 2809ci won't allow me to listen to a PCM stream in night mode. Not a big deal for me since I live alone, but for others that might be a draw back. It would also mean that someone with the same set up as me can't listen to a TrueHD/DTS-MA soundtrack in night mode.
Also, for those of you asking whether you should choose Bitstream or LPCM for DVDs or Blu Rays without HD audio tracks, your best bet would be to consult the receiver section of the forum. As mentioned above, different receivers handle PCM and Bitstream sources differently.
Now, everything said above in regard to player capabilities is about the PS3 as a Blu Ray player. There are Blu Ray players on the market that will Bitstream HD audio codecs. For help on those, please visit the Blu Ray players section of the forum. There's lots of great info there.
I hope that I've explained everything well enough that everybody understands it and is able to use it to get the best possible Blu Ray experience from their PS3.