I agree with Seth+L. I use AVR for HDMI switching. You can use a TV but httat kind of defeats the speakers in an HT system.
If your are coming from satellite or cable you should need no video upconversion.
If you are talking about SD in yor BD player that should do the up conversion.
Jostenmeat is right, you need to pay a lot of bucks to get good video upconversion; but, you probably don't need it. The AVR I currently have sucks on Video upconversion it will only upconvert to 480p; but I found that I rarely need or use it. I hooked up a VHS just to see if it would work and it video upconverts and it looks pretty good.
Audio quality comes from your speakers, not your receiver. The Audio Video Receivers (AVRs) you are looking at are all fine.
If you want small speakers, like bookshelf. Here are some very good ones that have excellent sound. Cambridge Audio S30s They are small ( about 9 1/2 Inch D x 6 inch W x 9 inch H ) The cost $219 per pair:
http://spearitsound.amazonwebstore.com/Cambridge-Audio-S30-Speakers-Natural-Oak/M/B00196SJOI.htm?utm_campaign=froogle&utm_medium=organic&utm_source=froogle