Ultimate AV has a new article regarding how HD DVD and Blu Ray players send multi channel audio tracks to av receivers and processors.

All HD DVD and Blu Ray players have onboard decoding of Dolby Digital, Dolby Digital +, and DTS. All HD DVD players feature lossless Dolby TrueHD decoding, it's part of the mandatory HD DVD specification. TrueHD is optional for Blu Ray, and only a couple of Blu Ray players have the feature. DTS-HD (DTS' equivalent of Dolby Digital +) is capable of better bitrate than the old DTS codec, but still lossy. Like it's lossless counterpart, DTS-HD Master Audio, it's still missing in action. HD DVD players advertise DTS-HD(core only), which means that they extract the standard DTS track present in all DTS-HD tracks for playback. DTS-HD and DTS-HD Master Audio will finally debut in the forthcoming third generation Toshiba HD DVD players.

The way that current HD DVD and Blu Ray players deal with these compressed, multi channel audio tracks is to do the decompression onboard, then convert the audio signal to a multi channel PCM track to send out to the av receiver or processor. Much like with compact disc, your receiver doesn't have to do any heavy lifting. The audio being fed into it is already decompressed and separated into a multi channel signal which your receiver or processor applies volume to and sends to your speakers. The newest revision of HDMI, 1.3, allows devices to send the compressed signal as a bitstream to your receiver or processor for the decompression to occur there. This is the way things have always worked with Dolby Digital and DTS on our DVD players. There is no specific advantage to doing so other than people are simply used to things working that way. The one selling point had been receivers with DTS-HD Master Audio decoding onboard, but now that they are showing up, HD DVD, and presumably Blu Ray, players that have support for the codec are arriving shortly. This has been a moot point for a while, because while HDMI 1.3 HD DVD and Blu Ray players have existed, A) there haven't been any HDMI 1.3 receivers to hook them up to, and B) HDMI as implemented by these players still restricted them to outputting PCM multi channel audio over HDMI instead of bitstream.

This all changes shortly, as the HDMI 1.3 receivers have begun to show up, and starting in September the new HD DVD players will support sending bitstream multi channel audio as well as PCM. It remains to be seen whether Toshiba will release a firmware update for older players to enable this behavior. As Ultimate AV found out, these devices don't yet operate the way we would expect them to. Nevertheless, if you've already gotten off the fence and purchased either a Blu Ray or HD DVD player, you know that the audio performance they present is just as impressive as the video upgrade they offer. *addendum 14Aug07 Evidence has arisen that HD DVD discs that use advanced authoring will not pass bitstream over HDMI, making all of this talk irrelevant. Which discs use advanced authoring? Well, so far as I know, all of them. Advanced authoring is the reason that resume play from a stopped state doesn't work on HD DVD, necessitating the bookmark feature of HD DVD.