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Pure i20 and iOS 5

I've just upgraded my iPod touch to iOS 5 and have noticed that when docked to my i20 the volume control on the iPod is now active whereas before it was inactive. Does this mean that the iPod is no longer outputting digital information and therefore bypassing the DAC in the i20? Is this even possible? I'm convinced that the sound quality isn't as good anymore but I could just be imagining it! Also the remote operation is now unreliable and sometimes requires multiple presses to make it work.

Anyone else had the same issues?