Since you said "in0-in7" I will assume you are talking about ArduPilot Mega. The hardware failsafe multiplexor operates on in7, however there will be a user parameter in the firmware so that you can set flight mode on any channel you choose. If you do it with a channel other than in7 then it is a software (only) function and does not involve the mux.
All the input channels connect to the 328 and only to it. Also there is no way to communicate between the 328 and the main processor, so how is it possible to switch modes using software? the main processor cannot know the data from the RC receiver...
The PPM signal OUT of the 368 goes INTO pin 49 (PL0) in the Mega1280 chip. From there, the signal is DECODED via SOFTWARE so you can do whatever you want with the ch1 thru ch8 inputs to the 368 chip.
The 368 chip MULtiplexes the 8 RX inputs and makes the PPM signal for the 1280 chip.
I hope that explains it.
The data is a combination of all the received radio channels into the 368.
we need 8 inputs to receive the radio signals into the 368. Then we need a lot of software to decode this signals
The PPM signal only takes up one pin of the 1280. Then it is software to decode this stream of data.
This is the advantage of using the 368 to combine all 8 signals on 8 pins into one signal sent to the 1280 on 1 pin.
Now do you get it ?