what is purpose of home theater processor?

Chadnliz is correct, some processors can do all kinds of advanced things, but the first question you need to answer is, "do you want surround sound"? If the answer is "yes", then you'll need a surround processor or receiver, as well as all the speakers and possibly a subwoofer. If the answer is "no", then you can get a good DAC. It sounds like your post states that you have stereo, and want to know if a surround processor is needed for your "digital" sources. Correct me if I'm wrong. If this is the case, a good DAC will allow your digital sources to sound better in stereo.

What exactly is your goal?

It has always seemed to me that one would be better off setting up a two channel stereo system that plays great music and then getting a DVD player to watch movies. You won't get the special effects from action movies, earthquakes and jets going over head but home theatre is very similar to an expensive two month love affair.

The opinions expressed above represent only mine and are not intended to undermine or cast dispersions on any home theatre junkies.

I will second Cadnliz comments on this topic. Movies especially anything made in the last twenty years are meant to be enjoyed in full surround. If you are seriously considering assembling a home theater system you should seriously consider going the full surround route, as a matter of fact I wouldn't even call it home theater with strictly 2 channel sound, I would call that a movie thru your stereo. The last point I will make is a simple one, if the filmmakers took the time and effort to make the movie and played it at the theaters using multi channel sound tracks, don't you think to get the best representation of that at home you should utilize the same multi channel playback. Wow and that all comes from a tried and true 2 channel guy LOL!!