HDMI vs 7.1-channel analogue outputs

So if the digital signal is passed out of the source/dvd via hdmi, does the processing just take place at the AVR level?  As long as the the AVR has decent processing I wonder if the main issue with HMDI is additional signal noise with a longer path to digital to analog conversion.  

Yes, analog's square wave is much easier to pass thru a metal based signal cable than small packets of digital bits. Might I suggest taking a look at a article entitled "A Deep Dive into HDMI Audio" on Audio Science Review website for a little more clarity on the matter than I can provide.

The better audio amplifiers are much more likely to have analog inputs than HDMI inputs.