I think that receiver cannot handle ANY audio via HDMI input. You will need a shotgun connection of SPDIF, like an optical or coax.
upscaling is video processing of sorts. Honestly, I wouldn't care to use any, unless it was Reon or Realta.
If your PS3 is your main source, I wouldn't worry about it.
You don't need hi-def decoders in a receiver, since that's what the PS3 does for you already. All you need is HDMI that can handle audio, and after that I would get one that can matrix into multi PCM into 7.1 if that happens to be the config you run.
I've said it before, and I'll say it again, I don't think HDMI receivers that cannot handle lossless audio should have even been built.
I'm not all that electronic savvy and I bought the sony STR-DG520 RECEIVER and am now reading that this receiver doesn't "process the audio found on the HDMI inputs, nor will it transcode or upscale analog and component video inputs to the HDMI output or vis versa." I just plan on watching movies, playing ps3,other normal activities on my Proscan Lcd FULL HD 42inch model 42la45h; also bought Sony flat panel speaker system saft1h; what does the "no upscaling and no processing of audio" mean in terms of quality, sound, etc.