What exactly does a DAC do?

Ok...I'll help.

A DAC is a digital to analog converter. Your NAD has one inside. Basically, every cd player is really a transport (the part that spins the disc), a DAC, and a power supply for both. Pure Trasport? yes, there are just transports that won't do much for you with out a DAC. Most DAC's (and transports for that matter) will not work with SACD. It takes a special interface (computer type connection).

Will a DAC help you? Hard to say, depends on the DAC. With you NAD setup, you might just try a better CD player, if you can hear the difference, then maybe go that route. Opinions may vary on this, but unless you are going to spend several k on a DAC, I think the one box players are likely the way to go...

Now you might really like a SACD player...or try a turntable (I just had to get that in somewhere!)

1. What does a DAC do?
Converts serial Digital data to two-channel analog

2. What is a transport? Is there such thing as a pure transport?
Reads CD's optically and outputs a special serial digital format called S/PDIF (Sony/Philips Digital Interface)

3. Would a DAC be beneficial in my rig?
Sure, most CDP's are inferior to god Transport/DAC combinations.

4. Would a standard DAC work w/SACD, if I upgraded later.
SACD does not allow the digital signal. The outputs are analog, however, you can still use the SACD transport to play normal CD's with your DAC.

Above responses on the money but I will add one contrary opinion. Due to the steep "obselescence (sp?)" factor in digital and the way that many audiophiles are early adopters, older, but very good DACs can be available for about 25% of retail. Muse Model 2 for about $500, Classe' DAC-1 or Muse 296 for under $1K. If you have a modest system and want to get a taste of real high end, try the Muse Model 2 and a decent digital cable (assumming your NAD has a digital out, otherwise you will need a whole new player). You will, I think, be floored. NAD makes some pretty good stuff and I have bought many of their products over the years, but getting a good DAC or even a good used player (Sony 9000 ES or Elite DV-09 maybe at about $600) would probably be a big upgrade.