DAC Recommendations

The Musical Fidelity A3 24 isn't bad sounding and you can pick 'em up for under $600 used. I've had one for a year and it sounds good. Try a good digital cable with the money you have left over. Some of our local audio group are using digital cables from Ridge Street with good results.
If you must spend more on a DAC, then the Audio Note seems like a good recommendation.

Rooze

For a little more, I love the Reimyo DAP-777. I paid $2300 for a demo that I think is the best money I have spent on my system.

I bought a near mint McCormack DAC Deluxe for $285 on Ebay (the upgrade alone from the standard DAC to the Deluxe is $250!!) and use a Sonicwave 280 strand glass toslink ($23 from Buy.com) with my old 5 disc sony CDP 75es player. WOW!!!! I hear things in CDs I know well that I never heard before; much better sound stage, smoother highs, new bass authority,increased dynamics, proper harmonics and decay of notes. For a total of $340 including the Deluxe McCormack DAC, glass toslink interconnect and shipping it is a bargain you can live with and easily improves the sound of multidisc redbook cd players. I think you will have to spend a lot more to improve on this combination. The service department at McCormack was extremely helpful and even sent me an owner's manual at their expense. Great people to deal with. I'm more than satisfied and I'm not easy to please.