Basically. There are actually three options, though.

1. Digital connection from source to 970 (optical or coaxial): using 970's DAC's.
2. Analog connection from source to 970, bypass mode selected: using source component's DAC's (970's digital section is bypassed, including bass management and surround processing modes)
3. Analog connection from source to 970, mode other than bypass (such as Stereo, DTS NEO:6, Dolby Pro Logic IIx, or 5/7 Stereo) selected: using source component's DAC's, 970's ADC's (to convert analog signal to digital for processing by the DSP section of the 970), and the 970's DAC's

All of that assumes that you are using stereo analog inputs. The 7.1 analog input is governed by the three-position toggle switch on the rear panel (with three more options: a bypass that behaves like the bypass described in option 2 above; a high-pass filter/low-pass filter that behaves as described in option 2 but with an 80Hz analog bass management circuit in the mix; and a digital setting that behaves as described in option 3).