I know that AWD will drain HP but in cornering will the improved handling make up for lost HP?

it depends on the car, but usually, for example AWD DSM's are better autocross cars than FWD Turbo DSM's (although neither are very good)

I'm not talking about FWD I mean 2WD in general (I'd prefer mid engine RWD).

1st of all, there is nothing wrong with fwd DSM's. i race a 01 eclipse with the 4 banger, and consistantly run with the mustang gt's, and BMW's. i personally would go with AWD, but this depends on the course. here in tucson the track is usually pretty tight, but where you might be, RWD might be best. you said you like mid engine cars. get a older MR2 and put a northstar V8 in it. they hall ass!!