HDMI 1.1 supports full resolution 7.1 LPCM audio. Your BD player decodes the Dolby TrueHD or DTS HD Master into it's unpacked version and sends it along as a 7.1 LPCM digital audio stream to your receiver. The 7.1 LPCM is simply a decoded version of the HD audio track and it maintains its lossless audio quality. Blu-ray was designed to be used with LPCM audio and not bitstreaming and that is why you didn't see HDMI 1.3 until later. It is not part of the BD spec. When you pass bitsteam, you lose the ability for the player to mux audio commentary from extra features.
See AVS forum for a complete explanation.
http://www.avsforum.com/avs-vb/showthread.php?t=738511If you want to upgrade, don't do it because you want your little DD TrueHD light to come on because there is no difference in audio performance.
