iPod with a DAC

I have an iPod that I want to interface with my Music Hall Mambo that has a built in DAC. I have tried it using the line out into the analog line in inputs and have also used the Radio Shack A/D converter to convert it for the digital in.

I have heard that because the iPod is Analog out there is no way to improve the sound...I tend to disagree because the sound "to me" is better using the upsampling built in DAC (again it may be an illusion that I am hearing/creating). However, there is more backround noise. Does anyone have any experience with the iPod and a outboard DAC or have any suggestions?

Thank you for your time in advance.

PS Much to my surprise the Mambo sounds decent with the Triangle Celius speakers. It has a almost tube like sound and affords me some flexibility that I didn't have with my tube integrated.
I rip all the music with Apple Lossless and there's no need to have anything converted or so IMHO. The iPod sounds brilliant over just the cinch into the pre. Try to avoid the firewire for listening, though.
There is no digital out of the ipod. Not yet anyway.
If you have an iPod perhaps you have a Macintosh computer, and if so, you can encode your music with Apple Lossless and then send it from the Mac to an AirPort Express (this has the added advantage of keeping your moving hardware and fans in another room if you like). The AirPort has a toslink digitial out that you can send to a DAC (it also has an analogue out but I find the sound from that disappointing).

Having said that, I agree with the thought that your iPod running lossless-encoded music should be good for most needs (Stereophile class C).
Aida, Brooks and Kerimf thank you for your response. And you all are correct as I am learning. I did buy the Airport Express and am currently trying to interface it with the stereo via the digital out. Unfortunately I downloaded my library using AAC not the Apple Lossless. I am hoping they come out with software that can convert the AAC files to a file like Apple Lossless.

However for now I am working on getting the Express to interface with my existing network/base station. Thanks again.