Newbie Help Please...

With a windows machine there are few "plug and play" driver-less solutions but I do know of the perfect ipod /dac solution for you. I'd be happy to walk you through it and make additional set-up suggestions if you'd like to contact me at 253-737-7407.

We specialize in computer audio and usb dacs. Our web site is seattlehifi dot com

Burt - Seattle Hi-Fi

PC-to-DAC advantages: you have access to your entire library at one time, not just what's on your iPod. You can save some money not having to buy a digital iPod dock. Setup might be a bit more complicated, but if you are a computer oriented guy, and are willing to tweak a bit, you can get better sound quality for less money.

iPod-to-DAC advantages: If you are completely iPod based, i.e. you use it in the car, at work, at the gym, this could actually simplify your life a little, compared to the PC route. A decent USB/SPDIF converter will still imporove the sound coming off of a digital iPod dock, so if you go PC audio first, then get a dock, money spent on the V-link (or other) is not lost.
one thing that bothers me about the iPod route is that the docks all come with remotes, but the iPod screen is so small, you'd have to get really close to it to see what you are browsing. PC laptop screens are bigger!

sound quality will be dependent upon the clocking of the digital signal and the DAC. Generally it is not a good idea to go analog out of a digital iPod dock or a PC sound card. Get a good DAC that re-clocks the incoming signal (asynchronous), or use a USB/SPDIF converter (Vlink, Audiophilleo, Anedio, Stello, Jkenny, dare I say Empirical Audio...?!?)

The DAC I am currently using is an Emotiva XDA-1 which does not re-clock the signal. Will this defeat any chance of getting good sound?

Lots of people on this site love the XDA-1, and general consensus is that this DAC is a great value. I heard one at RMAF and I was pleasantly surprised, but I don't know if they were running the signal into the USB connection or not, I suspect not, I didn't see a laptop. I don't know how good the USB implementation is on the XDA-1. Keep in mind, it's USB is only 24bit/48kHz, so if you are playing hi-res files, you need a converter to go into the other inputs, which are 24bit/192kHz. I'm not saying the USB on the XDA-1 is bad, just that using a good USB/SPDIF converter would be better.
There are other issues to consider, like playing audio within windows vista. Not sure of any driver conflicts here. Try to use Jriver or Foobar, or purchase Jplay to run within iTunes. Simply playing music through USB using only iTunes will not yield results that are very good. Jplay, Jriver and Foobar all utilize WASAPI and/or kernel streaming, which bypasses certain Windows signal processing that hammers the sound quality.
Of course, if you are using an iPod and, say a Wadia digital dock, these software issues are out-of-mind. But a digital dock can still benefit from a re-clocker.

Makes sense Realremo. I think I will go for the I-pod doc as I am not that computer savvy. Thank you for the suggestions!

Go with the Wadia dock, they were the first to bring the digital iPod dock to the market and their product looks the best...! There are usually a few on A'gon for sale.