I honestly wouldn't worry about it - a really good set of Component cables are actually better than HDMI. I realize HDMI is dig -> dig however you get a much more "fluid" lifelike feel to the TV! HDMI is good for one reason - because it can carry audio and video on the same cable.
DTS-HD/Dolby Plus is simply the next step in audio and higher bit-rates. However, if you have even mentioned the word budget in your question, you won't notice a bit of difference!!
I used to consider myself a true audiofile - I have a $10,000 pair of front speakers alone, a $3,000 reciever nothing but what I thought was the best... When I switched to HD, even I couldn't tell a difference with my hearing and my high-end equipment!
It was only when I started working for a HIGH END electronic store that I realized what a true audiofile was. Of coarse, we had people come in and spend a few hundred grand on a theater just because they could because they were so filthy rich!!!
...However, we'd have the occassional (real) audiofile come in and tell us exactly what he wanted. $110,000 reciever, $35,000 speakers (EACH!), and cabling more expensive than me or you would spend on our entire theater! ($450/ft for speaker wire!!)
Those were the only cases I could ever tell a real difference...
If you want to put your money to better use - look into a very (clean) high-powered reciever or pre-tuner/amp setup. I personally prefer NAD or Onkyo for a less expensive alternative.
Or even better, a very good set of speakers! My favorites happen to be Pinnacle, Jamo, and PSB in a lower price range (or much higher!) They all offer a wide variety of product.
Anyways, back to what I was getting at - you'll notice a lot better sound with better equipment than you will by switching to the new audio codecs!! I'll bet you won't notice a difference going to HD audio...
Hope this helps!
Ok, just read your current setup...
I'd see if anyone in the area sells any of the brands I mentioned along with B&W... If so, go to the store and listen to the speakers and you'll see what I mean!!
You can pick up a great set of Pinnacles or Jamo's (my fav's) fairly cheap online. I found one of the best and most rare choices (and EXTREMLY CHEAP!), but if I post it here everyone will snatch it up...
Send me a private message and I'll tell you where to go ;)
Or I'll see if I can send you a message to your email...
The difference in sound you'll notice from these speakers will FAR exceed just upgrading your reciever so that you can utilize HD-Audio!
...hey I have to go for a little while, you're on my contact list though - if you send me an email I'll make sure to write back and let you know where you can buy these speakers. They're about $450 and you can buy them for only $35 right now - if you don't buy them I AM! I already have one set and I'd gladly take another!!
------------------------------------------------------------------------------------
...IN RESPONSE TO YOUR RECENT ADDITION:
There are 2 digital standard audio formats, and a 3rd which was pretty much phased out. The first being the 5.1 Format - created about 12 years ago - means it uses 5 speakers + 1 subwoofer - the .1 is the subwoofer. In this scenario you'd have (1) front center channel, (2) Front speakers - ideally 45 degrees from the listening area, and (2) rear speakers...
A few years later they came out with Ver1 of Dolby EX or 6.1 which used the same exact setup only added (1) Rear Center channel - this was quickly phased out for many reasons.
Finally they created Ver2 of Dolby EX and DTS 7.1 which uses (1) Front Center, (2) Front L/R, (2) Side L/R, (2) Rear L/R, and (1) subwoofer...
Like I said, I have sold recievers for more than $100,000 and helped in installations in theaters worth over $3M and even then the gains from 7.1 are minimal. The 7.1 standard is kind of a marketing scheme in my opinion...
A) you'd need a very large room
B) you need perfect speaker placement to sound good
C) 5.1 is as good or better if you're using a good reciever with time alignment adjustments!
What the other responses are talking about for multi-channel input is a thing of the past! Basically, your DVD, HD-DVD, or Blu-Ray player will have 6 or 8 outputs, your reciever would have 6 or 8 inputs and it sends the audio from each channel over a different cable...
Both new Recievers and Optical Players have "optical" and "digital coax" outputs and inputs. An optical cable is just what it sounds like, a fiber optic cable that carries a 100% pure digital signal using either an LED (light emitting diode) or lazer...
A Digital Coax cable again, is a 100% pure digital signal only carries the signal over a copper wire in a series of 1's and 0's.
Your reciever then takes this signal of 1's and 0's (used by both optical and dig. coax) and processes it into sound that you can hear :) This is what they refer to as your D/A converter (digital to analog), which is why I say a good reciever is very important!
The 5.1 or 7.1 standard have NOT changed at all with either HD-DVD or Blu-Ray! What has changed is the bitrate that the audio was recorded in. By using better microphones, processors, and larger storage they are able to recreate a better sound in lamens terms. Signal loss that was referred to is caused by compression - taking a large unchanged signal and making it smaller to fit onto the media. Your reciever's processor then tries its best to recreate the same sound - but you can't make something out of nothing!! This is why people often used EQ's in the past to try to bring the high's and mid's back into the sound by increasing the output at a particular frequency, but added distortion by doing so...
So, going back to my origonal response a better pair of speakers is going to be much more benificial because of the fact that even if you were to convert to better audio, your speakers wouldn't be able to reproduce the sound quality you've gained at your reciever... You just will not notice the difference!!
If you already have a good reciever with either 5.1 or 7.1 audio, then your next step is to buy better speakers. Contrary to everyone's belief bigger is not better - my front speakers retail for $5,000 EACH and they contain (2) 8" drivers, (1) 4" mid-bass driver, and (1) 1 3/4" liquid cooled neodinium tweeter! The sound comes from the enclosure's design (sealed/ported/bandpass/transmittion line/etc) as well as the enclosure's size, material, port area and length, speaker placement, etc etc etc!!!
Like I said - send me a message and I'll show you a link to a pair of $450 speakers for $35! You'll be blown away by what such a small speaker can do - words can't describe it...
Oh BTW, Your Center Channel is the MOST important speaker in a theater - ALL Dialogue comes from this speaker, and the rest just produce the background sounds and music, while trying to reproduce the "3D" effect.
Also, When choosing cabling you should go with a GOOD Digital Coax cable for your audio - cheap optical cables are known to throw off time alignment - where the voices aren't sync'd with the lips moving on the TV sort of thing. The Dig Coax also carries a better digital signal as long as it's a good cable with minimal signal loss and well shielded...
"So you're saying really all you need for the new 8-channel audio tracks to work is Multi-channel outputs on your player, and the same on your receiver; even if your receiver doesn't read the new formats?"
Yes and No... There is no "new 8-ch audio", that's really just 7.1! The only difference in the signal is that they have slightly increased the quality of the sound, so your reciever does not have to have the new processor. If it were me, I wouldn't even use the 8 seperate ouputs/inputs - like I said before I'd use a good Dig. Coax cable which will carry all 8 (7.1) channels on a single cable in a pure digital signal which is then converted at your reciever...
The end result is the same as using 8 RCA's to carry each channel, only you're using a pure digital signal instead of analog. Basically when you use 8 RCA cables, the Optical Drive is doing the Dig -> Analog conversion instead of the reciever!