Sandra,
Whatever you hook up to a DAC using a digital connection - CD player, DVD, etc., you're bypassing the DAC in that device and using the external DAC's DAC.
That sounds confusing. Maybe this way makes more sense (brand names are arbitrary)-
If you connect a Rega Apollo from its digital output to the Naim DAC's digital input, the DAC in the Apollo gets bypassed and the digital signal goes directly to the Naim DAC, which decodes it and turns it into analog music.
The iTransport extracts the digital stream from an iPod, bypassing the iPod's internal DAC. It basically acts just like the Apollo in my example. Very few products can access the iPod's digital stream - the iTransport, Naim DAC and Peachtree iDecco are the only ones I know of.
The Naim DAC can access the iPod's digital stream directly, without using the iTransport.
Hope that clarifies things!
JR