Generally with Blu-ray, you want the player to decode the audio. This way you can take advantage of multiple audio streams at the same time which is not possible if you send the native bitstream to your receiver. But, an internal decode, plus HDMI and PCM audio is a great way, and in my opinion, the best way, to deliver audio.
What player?
The PS3 is still a rockin' product. For $20 you can add IR with the Blue Wave remote, and you don't just get mp3 playback from a disc, but can network it to your PC for streaming of photos, mp3s, and videos if you want. Likewise, you can load mp3s onto it, or rip your CDs to mp3 format right on it.
But, we are finally seeing price competitive products hit the market, including the new Samsung BD-1500 which is a value leader at around $200 for profile 2.0 compliance.
Since we have players around $200 that are profile 2.0 I would stick with that. Especially if you have the Internet connection there, which I believe you would if you have a A35 already. But, for 'best' stand alone at a reasonable price, I would likely look towards Panny. Since Panasonic has the most patents in Blu-ray, you are likely to see some of the best products hit the street from them. Yet, your xa35 HD DVD player was a killer loss leader product and a great value. It offers superior upconversion compared to almost any other DVD player on the market. You are NOT going to get better upconversion without going to the top of the line Denon, which makes little sense. The Oppos (for DVD) can have the same quality, but will cost as much as a Blu-ray player.
I would likely go with the Sammy BD-1500 or the Panny BD-55 if the PS3 was not something that I could live with.