The DAC1 does not support DSD either - only the DAC2 does.
Media Center does a good job converting DSD to PCM though, and I don't think you're missing out by doing so.
I own a DAC2 and prefer to have Media Center convert to PCM than use native DSD.
There's been a lot of hype around DSD lately, and I think it's just a push from manufacturers to try and sell you new hardware, now that there are widely available DAC chips that can decode it.
Honestly, with a good DAC, CD-quality audio (16-bit 44.1kHz) sounds fantastic - the quality of the master matters far more than whether it's playing DSD or high res PCM.