Will a DAC drastically improve Apple TV?


I have been thinking of getting the apple tv so i can have my entire itunes collection available for play through my new audio system. Problem is, i have connected my ipod through an rca cable to my system and it sounds terrible. I have connected my laptop and certain tracks sound ok, others, terrible. very muddled, no detail, and no bass. Will a dac such as the bel canto dac 2 make a dramatic improvement with mp3 playback (192-256kps)? Also, the Tos link, is the optical link that would work with the apple tv right?

I am new to all this stuff. Just recently bought a mcintosh 6450 integrated, and a pair of gallo 3.1s. Was thinking of getting a hard disk player such as the mcintosh ms300 but probably not for a while. And if the apple tv with a dac will sound pretty good, that may be the easier route.
farjamed
For the level of gear you are using it is nuts that you are playing back compressed Mp3 files. You need to re-rip your collection to Apple Lossless with error correction turned on. This will make a bigger improvement than any gear you buy. After that, yeah a DAC makes it a lot better for sure and would be well worth it.
I have the 160 GB Apple TV. 400 CD's is about 120GB in Apple Lossless. I have a Naim Supernait which has a built in DAC. I am very pleased with this combination. The Apple TV combination also compares favourably with the Naim CD5x which in case you don't know is a $3400 CD player. So in summary the Apple TV works well as a media player. I just hope they make a version that has a bigger hard drive.
Also check this thread on Audio Circle: http://www.audiocircle.com/circles/index.php?topic=64609
I have just inserted a Cambridge DACMagic DAC in between my 160G Apple TV and the analog inputs to my Pioneer Elite VSX-82 receiver. My cables are an older Monster high grade toslink cable and a pair of Harmonic Technology Truth Links and I am astonished at the results I am getting after three days of burn-in.

I play Apple ALAC files that have been synched to the Apple TV hard drive and I am very happy with what I am hearing. The sound quality exceeds what I was hearing from Redbook CD's played on my Sony ES 999 CD player