If you connect the dvd player to the receiver with component video cables and then also use component video cables from the 'monitor out' to the tv, no processing will occur.
The 702 does transcode from composite/s-video to component though, so if you were to also connect some other device to the receiver using either composite or s-video, those signals will be converted to component. That is the convenience factor Spiffyfast is talking about. You only need one connection to the tv and the receiver will take care of converting all video signals to component. You never have to change the input on the tv. When you change the input of the receiver, say from dvd to video1, the receiver will switch the video and audio at the same time.