This is terrific, I am learning a lot here.
Question: What type of "high-end video processor" are we talking about here? Can you suggest what I should be looking for in the specs of say Denon, Onkyo, Marantx?
Anchor Bay Technologies, Silicon Optix Reon and Realta, Gennum VXP and PixelWorks all make high quality video processors.
Denon's top model uses the Silicon Optix Realta while the latest mid range and lower models use the Anchor Bay Technologies Inc. ABT 2010 and 1030.
Onkyo's top and near top model receivers use the Silicon Optix Reon.
Marantz has used ABT in their receivers, not sure which one.
Question: How do I determine if my A/V receiver supports multi-channel PCM input or a 2-channel only?
I would think in most cases they do make that clear in their published literatures available on their websites.
Question: Lastly, there seems to be mode whereby the receiver does not do any processing but takes "as-is" the player's inputs to out into the speakers - called Direct Mode or something. What is it and how does it tie to this overall picture of decoding? Does it mean I have to have a similar feature in my player too?
It depends on the brand/model. I have a Denon, and I can simply set upscaling to off if I want it to simply pass the signal through untouched.