looking for audio setup input and suggestions

Look at an Energy Take Classic 5.1. These can be had for under $300. Combine it with a low cost Onkyo receiver from ebay and it will blow away TV sound.

Most anything is better than TV speakers.
A soundbar is a step up (perhaps).
An HTiB is a better step up for sound and convenience.
A receiver and 5 speakers with a sub is the way to go.

As for, "and since the PS3 does all the sound decoding id need or care about with regards to movies, i don't need an receiver to do all the decoding, just processing the PCM data"... you may have a misunderstanding.

Bottom line is, do you just want an "upgrade" for better sound (stereo only) or looking to utilize the surround potential that's possible from cable/xbox/ps3?

Any of these (or something similar) would be better than "stereo" IMO.
http://www.bestbuy.com/site/olstempl...c=abcat0200000

A sub in your budget won't make much of a difference in that room, so I wouldn't worry about getting one right away. I would get two full range tower speakers, so you can still get some nice bass. If you dilute your budget to much more than that, you will end up with no bass whatsoever.

There are two directions I would consider with that budget. One is to buy two nice full range speakers and a disposable AVR, with the intention of upgrading the AVR later. The other is buying a decent AVR and two cheap speakers, with the intention of upgrading the speakers later.

For option one, you could buy the Infinity Primus p362. It is perhaps the most highly regarded tower speaker in it's price bracket, if you don't believe that then go look in the Infinity Primus thread in the speaker forum. You could get a inexpensive receiver off of craigslist or ebay which could power those things just fine and still stay under your budget, but you might have to do without newer features such as HDMI and DTS/TrueHD decoding for the time being. It will still sound very nice though.

For option two you could buy something like a Onkyo TX-SR607 which has all the features you will want, and get a couple of speakers off of craigslist or ebay or audiogon. You could buy a couple of these guys and move them to use as surrounds when you get more formidable front speakers, like say the above mentioned p362's. The advantage of doing option 2 is you aren't losing any money at all, although you don't get as nice of a sound right away.

If it were me, I would probably go for the first option, but that is me, and I love great sounding music, I am a audio junkie and I need my fix right away. The one thing I wouldn't do is buy a 5 channel satellite speaker set or a sound bar, those just wont have as massive of a sound as some good tower speakers. And also, you will need a real sub to get any kind of decent bass in a room that large, as it will have to pressurize that entire space, so remember to look in the subwoofer forum for ideas for that, otherwise you might just end up throwing money away.