Bitstream versus Linear PCM
The PS3 provides options for either "Bitstream" or "Linear PCM" when outputing the audio signal. This option is located in the "Settings->BD/DVD Settings->BD/DVD Audio Output Format(HDMI)" and "Settings->BD/DVD Settings->BD Audio Output Format (Optical)" settings of your XMB. Linear PCM is audio data that is not encoded (nor compressed) and is in it's pure digital form, ready for conversion into analog for the speakers. A regular CD stores all its songs in Linear PCM form. Most audio starting with the DVD store digital data encoded and compressed (like Dolby Digital or DTS Digital Surround). If "Bitstream" option is selected, the PS3 will take this undecoded and uncompressed audio and send it untouched to the HDMI or TOSLINK cable for your external decoder to decode. In other words, the receiver at the other end of the HDMI or TOSLINK must have special chips that can decode and uncompress formats like Dolby Digital and DTS Digital Surround, and then convert the resultant Linear PCM to analog (via a DAC) for the speakers connected to the external decoder. If "Linear PCM" option is selected, the PS3 will actually decode the audio into Linear PCM first, before sending it to the HDMI or TOSLINK. In this case the receiver on the other end of the HDMI or TOSLINK only needs to convert the Linear PCM to analog for the speakers connected to it. Because of the current bandwidth limitations of TOSLINK, choosing Linear PCM (the decoded and uncompressed signal) on this connection limits you to only two channels of audio. For multichannel (like 5.1) over TOSLINK, you must use "bitstream", which uses smaller bandwidth of compressed and encoded data.