The PS3 and my Onkyo

[MattVollet]

My fiances parents just picked up an 7.1 Onkyo HTiB HT-S5100(b) from Circuit City. I was trying to hook up the PS3 to it via HDMI but I guess the receiver can't decode audio from HDMI (which I thought was strange). So I didnt want to have to go get another optical cable, so I ran HDMI to the TV, and the optical out from the TV to the receiver.
So, with my setup like this (and im pretty sure I can only get 5.1 through optical) what types of decoding should I set up my PS3 to be able to handle?

Thanks for the help!