There seems to be a lot of bad information going around in this thread. I suggest that anyone interested in this topic check out a few threads on the AVS forum.
This one - Why you don't need HMDI 1.3 and
this one discussing PCM and receivers. HDMI 1.1 is all that is required for 1080P video and up to 8 channels of PCM audio as well as the standard legacy DD/DTS.
The following is a quote from Amir at Microsoft in the
Industry Insiders thread (pg.111) on the 360 and advanced audio/PCM output
So basically it looks like they've coupled the HDMI audio path to the same one they use for optical audio so it carries the same restrictions (1.5Mbps max/2 channel PCM ). Apparently they decided that adding an upgraded audio path for HDMI was not worth the extra design cost. It really is disappointing to hear. I have a PS3 connected to an HDMI Denon receiver. The uncompressed PCM and Dolby TrueHD audio on blu ray discs is excellent. Clearly besting the 1.5Mbps max DTS you can pull out of optical. If you've got the right gear to take advantage of it, high resolution audio really is very impressive.
I frequently point HDMI noobies to those exact same avsforum threads (the two receiver ones).
I personally think adding HDMI without changing the audio capabilities of the unit is a really dumb move, but that's Microsoft's decision. I guess my PS3 will be the only console to really take advantage of my receiver (also a HDMI Denon) for the next few years-
But on the bright side, this means I can get a "regular" 360 for cheaper than the "7331" one, and use the VGA cable that I already have (good thing I kept it).
It's still a good thing I sold my other one, because it had strangely loud case fans and a jet engine T/S drive