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setup 2 is correct.
easy way is to think of the way the audio signal would flow. which way do you want it to go from... in this case, HDMI is one directional, so for Video it is correct (Blu Ray to TV)
you want your audio to Flow from the OUTPUT of the Blu Ray player INto the INPUT of the converter. Then you want it to flow OUT of the OUTPUT of the converter INto the INPUT on the sound bar.
(btw if that's the convertor you got, i would use the TOSLINK (fiber) connection from the OUTPUT of the BluRay, INto the INPUT of the converter, it's a little more expensive, you can probably find something for cheap on Monoprice though, You get that extra little bit of digital quality)
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[03-07, 03:26] Yodamaster - The feeling when you quickly insert without hitting the sides
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