Robert G,
Roger Dressler has confirmed what I've said is accurate in several discussions at AVS.
DN flag (set to anything other than -31) causes the digital filter in the DD decoding engine to then recalculate the audio data (which *is* bit-for-bit accurate from TrueHD to start with) to perform digital-level-reduction based on the value. You no longer have bit-for-bit accuracy to the original data, just like running your audio data through a sampling rate converter or noise-shaping filter would re-write data.
That's how it works. Even Dolby doesn't challenge this. The only thing Roger Dressler had to say was that he felt personally that the re-writing of the data didn't cause any serious sonic degredation to the signal (a natural point of view for him to take). But he confirmed 100% that the process I've described above is exactly how DN is applied.
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Which tells me that your preference for the "DTS theater" had essentially nothing to do with DD vs. DTS, but the particular theater setup.
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Possibly. But one person's impression in a double-blind doesn't mean that same impression will be shared by another listener. Some listeners prefer the sound of 16-bit audio 20 bit audio, for instance-- not because it's more accurate (which it isn't), but because they like the "bite" it adds to high-frequencies becuase they prefer that sonic signature. The smoother, more accurate sound of the 20 bit sounds too "tame" to some listeners who like the more agressive mid-range of 16-bit sound.