AV receiver question?

[Hemps]

Hi All

My current setup
32 Sinotech lcd
LG Home theatre HT303SU (300w) DTS and connects to lcd via Component cables.
Philips dvdr3600 dvd recorder with hdmi upscaling connects to lcd via hdmi.

Will there be much of difference in quality playing normal dvd's through an hdmi upscaling device or when playing ot through a normal dvd with component cables?

When i play a dvd through the dvd recorder with upscaling to 1080p, i have to set aux on the home theatre in order to hear any sound, so a movie played through there doesn't have 5.1 as i understand it.
DVD recorder is connected to home theatre via composite audio L/R.
DVD has optical out but home theatre is one of those all in one's and has no optical audio connection of any kind - and that's my problem.

I would like to play movies through the HDMI recorder if it does produce better quality and have the suround sound played as usual.

What are my options - an av reciever?
My tv is getting cluttered with remotes and dvd players etc.