Yep, if you use the digital output from a CD or DVD player, the audio remains in the digital domain all the way to the 1070 - and all the way through the 1070's DSP section. The 1070's DAC's are responsible for the digital-to-analog conversion.

I'll let 1070 and 970 owners chime in with their thoughts on the performance of the DAC's...
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gonk
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