I'll answer based on my SP2, I do not know what the differences are between SP 1.7 and SP2.
The SP does not have HDMI, not a problem for sound as long as you can feed the video HDMI out to projector or HDTV.
You can use either the analog or digital input on the SP for audio. Typically with blu-ray the Lpcm stereo track has the best sound. Not every blu-ray or dvd I'm referring to here has a stereo pcm track of good quality. So then typically the dts track is the next best, and the digital dolby.
You will get better sound by having the SP process the sound and then using the preferred soundfield on the SP, this is why pcm is preferred over dts, dolby, tracks. This will give you good sound comparable to other multi-channel processors.
Now if you want to up the sound to another league. Then you would output the blu-ray player signal to an outboard dac ( I recommend a BDA-1,2,3) output the BDA-? to analog in on SP and then select the soundfield of choice or you could use digital stereo.
I believe using a dac to SP will give you audio on par with the SP3.