Two things. First off, if you plug your guitar/bass straight into the line input you'd get virtually nothing (unless they have active circuitry, which you'd know if they did). The signal they produce is very weak - it's just vibrating wires exciting a magnet - and needs to be pre-amplified to a level strong enough for a line input to capture it. This goes for microphones also. Hence to boost the signal to "line level" you need a pre-amplifier, the importance of which is shown by the fact that it seems half the threads on this bbs are about pre-amp choice and quality. Many people use Direct Injection boxes which will boost the signal as required, or alternatively mic the amp, run the mic through a pre-amp and then into the recording device. Or both.
Your drum machine on the other hand will put out a line level signal and you can plug that straight in to your SB.
As to your question, yes, you will be recording in digital - the SB card has an Analogue/Digital converter. Any recording on any computer or hard disc system will always be in digital form - they can't recognise anything else. The A/D converters on the SB are horrible - they are so bad that even I can tell, but nevertheless the first stage is to buy a DI box (or most multi effects boxes will do) that takes your guitar signal up to a strength that the SB can record it, and then at least you can start having fun with n-Track - upgrading can wait until later.
