The preamp takes all your audio sources like Blu-ray, MP3 player, TV etc… and:
- Does the switching i.e. selects the input you want to watch, say TV.
- May do Digital to Analogue conversion
- Does equalization (bass, treble, room equalization etc…)
- Handles the volume control
- Does any channel mixing (eg. Stereo to DTS Neo 6)
- Adjusts the voltage of all the inputs to an appropriate level
- Finally, send the audio signal to the Power Amp

The Power Amp is what amplifies the audio signal and drives the speakers. Most AVRs have built in power amps and can typically drive 5 channels (L,R,C,SL,SR). This is convenient because one unit does it all. However there is a tradeoff.

While AVRs may state that they can output 5.1 at 100 watts per channel for example, they cannot actually output 100 watts simultaneously to all 5 channels at the same time. My Denon 4311CI claims 140W to 7 channels but read the fine print and you will find it can only drive two channels simultaneously at that power. The AVR power supply simply does not have the capacity to do so. If you are like me and like your explosions loud, you may be disappointed.

In addition, if you drive you AVR beyond its capacity (which is easy to do) it may go into clipping which is very bad for your speakers and will ultimately damage them.

So what to do if you want louder explosions? You go with external amps. I use a 3 channel ADA1000 to drive my M80s and VP150. My Denon just needs to drive my two surrounds and two rears. It all sounds pretty awesome.

The catch with using external amps however is that you're AVR must have Pre-Amp outs.

I hope this helps clear things up a bit.
For every expert, there is an equal and opposite expert.