At the risk of repeating MrSandman's comments, The DSP involved in taking a stereo digital source (the CD) and creating an output that is a digital stereo signal is pretty straight forward. Not much processing required. But taking a stereo source and converting it to one of the DSP modes (splitting it into multiple channels) is quite a bit more complex.

I am using a digital coax between my CD and the 1050. I experience distorsion only in the NATURAL mode using the CD as the source. The NATURAL mode works fine when coming from a 5.1 DVD source.