Here is a recent thread that reviews this topic in more detail. In that thread , I posted a couple of long posts discussing the whys and hows of DACs and formats. I tried to keep the technical jargon down. The analog vs. digital connection discussion is a red herring in a way because all digital signals needs to get converted to analog somewhere in the equipment chain. The better question to ask is where is it best to convert the digital signal. The answer will depend on the quality of your equipment with the quality of DAC being of prime importance, though not the only factor.

http://www.axiomaudio.com/boards/showflat.php?Cat=0&Number=161844&an=0&page=2#Post161844

John