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.