what is purpose of home theater processor?

A home theater processor allows for digital inputs to be used from video disc players and set top boxes that offer 5.1 Dolby Digital and DTS surround formats, as well as older analog surround formats. If you want to go surround sound, you'll need a processor or receiver.

If you just want stereo (two channel), invest your money in two stereo gear.

While I am not an expert it goes much deeper then that.
They allow you to properly calibrate all speakers for equal sound output, distance settings are set for proper affects, crossvers are set for low frequency roll off then sends the needed info to the subwoofer if used.
Most allow specific settings for specific use, 2 channel material can have its own settings, mono another and digital information yet anaother. It many times also serves as the switching hub and "brain" of the entire rig.
Some even allow for further picture quality adjustment taking the system to an even deeper level of performance.

Chadnliz is correct, some processors can do all kinds of advanced things, but the first question you need to answer is, "do you want surround sound"? If the answer is "yes", then you'll need a surround processor or receiver, as well as all the speakers and possibly a subwoofer. If the answer is "no", then you can get a good DAC. It sounds like your post states that you have stereo, and want to know if a surround processor is needed for your "digital" sources. Correct me if I'm wrong. If this is the case, a good DAC will allow your digital sources to sound better in stereo.

What exactly is your goal?