In Order to playback SACD's do you have to do this over HDMI? I will be running COmponent and optical audio connections....
Yes, you can only get multichannel audio from SACD with HDMI on the PS3.
Will Sony send firmware updates by disc, if you have a 20g unit and can't run it to your computer?
No, Sony does not send PS3 firmware updates by disk, although some future Blu-ray disks may include them. You can add wireless capability to your PS3 with a wireless gaming adapter -- these typically cost less than $100, perhaps $40 off ebay. Or you can just run an ethernet cable from your computer room once every 4-6 weeks to download the latest version.
Ok so apparently LPCM is the best sound that you can get, but to get this you need to have a receiver that can accept an HDMI and decode the LPCM, correct??
Correct, to experience the high-quality LPCM audio, you need a receiver that can accept that audio over HDMI. Technically, there is no decoding involved.
I only have optical on my Onkyo receiver, so my best be is to set it to bitstream, correct??
Correct. If you don't have a receiver with HDMI, you should always have your PS3 set to bitstream.
If I set it to LPCM then I will only get stereo through my optical out right, even though from the post above it states that it actually sends out a rear signal for my speakers??
You do not get discrete surround sound with stereo -- rather, it is virtual surround sound (i.e. Prologic), like what you would get with any analog channel with stereo on cable. If you want true surround sound -- which by definition is discrete -- with optical, you must use bitstream.