@myoda - Thanks for the details and the link to the converter box. I might go that route in the future.
I had already setup the TV to pass DD5.1 from it's own tuner. From that I assumed it would also pass DD5.1 audio in from HDMI sources. That's rather unfortunate, I don't understand why the unit can't do it.
I read on (some other forums) that there is some negotiation via HDMI between the source and playback device about the playback device's capabilities and that most panels, including those from manufacturers other than Sharp, also have this problem.
That seems like a real short coming.
If we can configure this TV to output DD5.1 from its tuner, effectively telling the set that there is a DD5.1 capable device on the other end of the optical link, then the TV should inform it's HDMI connected devices that it is capable of playing back DD5.1 even if that means disabling on-board audio and passing the DD5.1 through the digital output to the off-board equipment. It seems silly that we have all these HDMI inputs on the set and it can't even MUX the audio streams at high quality. One discussion I read mentioned that this is done because the set may not be able to de-mux the DD5.1 stream down to its own two speakers. That doesn't make sense because the set still plays audio out its two built in speakers even when it outputs DD5.1 over the optical from its own tuner..... sigh.
I'll re-wire my digital audio later this week so my media player again goes direct to my receiver.
As an update to users who have this set, or one in the family of sets, Sharp released a firmware update today (April 10, 2012) called version "213U1203281". There is no mention of this firmware or release notes for it on the Sharp USA site. My set prompted me if if wanted to update to this version and I said yes.
From what I can tall all this firmware version does is remove the Blockbuster application from the set. I'm not sure if any of the Blockbuster rental service customers were interested in buying this TV but if you were you might think again.