OK so i have done a bit more research and found out that the receiver only does hdmi "pass-through" not any actual hdmi decoding.
I know it's my fault for not researching a purchase properly, but i am pretty upset about it.
I think it's fair to expect that if a receiver has hdmi inputs it will decode the audio in from said signal. Not sure if i should try and return it or not, i didn't ask about anything like this so i can hardly claim they misrepresented the product.
The result of all of this is..... my new setup will be..
360 -> tv via VGA. (apparently i get much lower latency to screen with vga vs hdmi)
360 -> amp via optical / spdif.
Blu-ray -> tv via hdmi
Blu-ray ->amp via co-ax digital.
Tv --> amp via optical. (so i can get 5.1 for OTA digital broadcasts)
so my only issue will be getting the Amp to recognize the digital signal coming down the co-ax from the Blu-ray, which i haven't been able to do so far
( i should be able to get an AC3 5.1 digital signal via co-ax right? )
That's bullshit and I would definitely try to return it.
By co-ax cable to do you mean RCA cable? You should be able to get digital audio through an RCA cable.