As a wise man once told me, in audio... "everything affects everything".
We have found that it is very easy to improve the sound quality with better cables (USB, Firewire, power cords, and of course interconnects from the DAC to the pre-amp), the DAC itself, music player software, and even the software that you use to rip the CD.
The old addage about "garbage in/garbage out" is certainly true with digital music servers. What goes into the DAC makes a huge impact on the sound quality that comes out. Certainly the better the DAC, the better the sound, but price is not always the best yardstick to measure performance by. We have heard several DACs that don't sound all that great, but carry a high price tag and we have also heard some that are very reasonably priced and sound great.
Steve Nugent makes some excellent points (as well as some excellent products) about jitter, digital volume controls, and using the right DAC chip, but the simple answer to your question is that better sound starts with the computer that is connected to your DAC.
Here are a few do's and don'ts.
Don't use USB for both the external hard drive and the DAC.
Don't use an internal SATA or an external eSATA drive to store your music on.
Do use a Firewire 800 external Hard Drive with an Oxford 93x or 94x chipset for music storage.
Do use a cut power Firewire cable.
Do use an asynchronous USB DAC and set the clock to the DAC.
Do use an SSD as the boot drive in your computer.
Do turn off or kill any and all processes that aren't absolutely necessary.
Don't use iTunes for ripping!!!
Do use a good quality USB cable from the computer to the DAC.
Do put at least 4 GB of RAM in your computer.
One of the biggest things that we have found is that when you get rid of the noise introduced by the switching power supplies (inside and outside the computer), the sound quality improves dramatically.
Kevin Burke
Mach2 Music
