The tape deck, VCR, and PlayStation can all run both audio and (for the VCR and PlayStation, if you want to do so) video through the 1070. The tape and VCR will use stereo analog, and I think the PS1 only had analog output as well. The TV should have an analog stereo audio output (possibly even a digital audio output, although that's generally reserved for TV's with over-the-air HD tuners). You can connect that audio output to an input on the 1070 so that you can use the 1070 for audio while watching TV.

The 970HD's HDMI cable can carry audio to the TV, but that can be defeated if you want - and I'd expect that you'll want to listen through the 1070 when watching DVD's anyway.

When it comes to the religious war between coaxial and optical, I'm agnostic - I don't believe that either is inherently better. Optical is immune to EM and RF interference, which is a plus over long runs or runs through particularly nasty tangles of power and speaker cables, but it requires a conversion from electrical to optical signal transmission that coaxial doesn't. For normal runs in an equipment rack, I believe that the two are going to be effectively indistinguishable if decent cables are used and the connections aren't messed up somehow. If you get a nice optical cable, it'll be hard to put a kink in it without some serious effort - I've long felt that Outlaw's PDO is a great optical cable at a really sweet price ($20). The only non-PDO optical cable in my system is an 8-foot cable from my Roku SoundBridge, and that's only because the SoundBridge is too far away for a PDO to reach.