KLee, how does your solution handle the sound that needs to be mixed into the audio stream (menu sounds, commentaries etc)? Doesn't it have to be decoded in the player to be mixed, then all sound output will be PCM? I just don't know if HDMI1.3 has any actual benefit for audio. In theory you could pass the higher audio formats direct, but I'm not sure about in practice due to BD-J and iHDs needs for audio mixing.
But basically, here's the food chain, starting with the simplest/worst first (PS3 in brackets if its likely to support that option:
1) Stereo phonos from the player to your TV (PS£)
2) Optical out to your receiver, carrying the original DD/DTS/EX (PS3)
3) optical out to your receiver, carrying DD+, DTHD, DTSHD decoded in the player, mixed and converted to high bitrate DTS/DD (PS3)
4) Analog outs from the player to the receiver, carrying DD+, DTHD, DTSHD decoded in the player, mixed and ouput as analog PCM (not PS3)
5) HDMI to your receiver, carrying DD+, DTHD, DTSHD decoded in the player, mixed and ouput as PCM (PS3 HDMI pack) - pretty much the same as 4 quality wise
My setup limits me to option 3. Even though I have analog inputs, the PS3 most likely won't have outputs. I should be happy with that for a while if PS3 is a good player. If not, or the sound is a lot better with 4 or 5, then I'll need a standalone player or upgraded receiver.