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.