"doesn't process the audio found on the HDMI inputs"
Let's look at the situation with your PS3. Because the DG-520 only features pass-through HDMI inputs, meaning that the signal is simply repeated to the HDMI output, the receiver won't process or output any 7.1 audio from the PS3. You'll have to connect the PS3 audio separately to the receiver with a digital optical cable that will only do 5.1 surround sound. This isn't a big deal if you don't have a 7.1 speaker setup. Also, it adds the complication of additional wiring for sound. HDMI audio processing is found on higher end models such as the Sony STR-DG720.
"transcode or upscale analog and component video inputs to the HDMI "
This means that if you connect any component, S-Video, or RCA video cables to your receiver, they won't be output to the HDMI output. This means that you would have to connect a component, S-Video, or RCA cable to your television to view these sources. Transcoding and Upscaling are two different things. Transcoding simply will output the same resolution video from the input to the output, while upscaling processes to the video to up-convert (increase the resolution) before outputting to HDMI. Transcoding and upscaling is really a convenience thing that allows you to simply connect one HDMI cable from your receiver to your TV. Without transcoding, you'll have to connect each type of video to your TV to ensure that it works correctly, and will have to adjust which input your TV responds to manually. So, let's say you want to switch from your DVD player to your PS3, you'll have to switch both the receiver and the TV.
There is some good info at the DG-520 and others in this price range in a previous thread: