Ok, so i've narrowed my choices down to 2 receivers:

The Harmon Kardon HK 3480 ($150) - 2 channel receiver with no digital optical inputs

The Harmon Kardon HK 3490 ($300) - 2 channel receiver with two digital outputs.

My setup includes a Samsung LCD (LN40A550), an HD cable box and a PS3.

So I can do two things heres...

1) Save money and get the 3480. I'll hook up the cable box and ps3 to the TV via HDMI and then run the audio to the receiver via RCA cables.

2) Buy the 3490 model and run the video from my cable box and ps3 to the tv via HDMI and then the sound to the receiver via optical cables.

My question is, if I shell out the extra money, will I be able to hear the difference with only a 2 channel system between the analog RCA connection and the digital connection? I live in a small apartment so I cannot buy a sub or floorspeakers. The receiver will power up a pair of Klipsch B-2 synergy speakers.

Any input would be great...still deciding what I should be doing. Thanks guys

Depends on which component has the better DACs. Even then I doubt you'll notice any difference. At any rate you're only doing 2 channel, I'd probably save the $150.

Can the 3490 really decode DD and DTS 5.1 audio and downmix it appropriately, maintaining the LFE channel? Does the PS3 maintain the LFE channel when it downmixes 5.1 to 2-channel? DVD players drop the LFE channel when downmixing 5.1 to 2-channel, but I do not know about the PS3.

Either way I think the LFE is gone.

If he goes option 1 dts and DD are non issues.
If he goes option 2, he'll have to set the PS3 for PCM output, since when you select optical output and PCM, the output will always be 2 channel.