blu ray player to TV to receiver?

[jakeacc]

Let me start off that I know some but not a lot about setting up home theaters. I tend to set things up that sound good, but may not be the right way of setting things up.

I have a blu-ray player (LG BD370) connected to my LG HDTV via HDMI. (HDMI input 1 on the back of my set) I have my HDTV connected via optical cable to my Yamaha receiver. (the optical cables goes into the optical input of my receiver but is connected to my TV via "MONITOR OUT" - probably where I'm making my fatal mistake)

I repeat this process for my cable box and xbox 360. They are all connected directly to my TV. The ONLY cable connected to my receiver is the optical cable coming from the MONITOR OUT output. With this method, no matter what Video input I have selected, the receiver stays on the same audio setting. One of the reasons I have it set up like this is so my family can use the TV relatively easy. (as long as the receiver is on, there will always be sound) Also, my receiver doesn't have any HDMI inputs, just optical, analogue, and multi-channel.

When watching HDTV and Blu-ray it SOUNDS like all the speakers are working in a 5.1 environment. (voices are in the center channel, ambient sound is coming through the surround speakers) But, for some reason, I cannot by receiver to display "dolby digital" when playing blu-rays. Instead, it displays pro logic II. (i can also toggle it to preset environments like hall, concert, arena, 5 speaker stereo, and straight) I have my receiver set to auto detect signal and choose the right one. When I watch TV, it says dolby digital.

so, what am i doing wrong? and is my monitor out solution really stupid?