PC audio with USB DAC

What are you using for music playback? ITunes? The best computer playback performance is attained when you can optimize the computer playing the music, and when you can dedicate the computer to only playing music. What operating system a you using, there are several guides created by various DAC manufacturers that tell you how to optimize your system for music:
http://www.benchmarkmedia.com/wiki/index.php/Windows_7_Audio_Playback_-_Setup_Guide
This is one example.
Audioengine is a great brand to start with, they also have a USB DAC you might want to try.
I think your playback problems might have more to do with the setup on your computer than the DAC you are using. TIP: If your music library is on an external hard drive, and you are using a USB DAC, try to use a firewire external drive, having both the drive and the DAC on the USB bus might overload the computer's innards and cause the problem you've described.
Computer audio takes some tweaking, but it's very rewarding when you get it working! Don't give up!

Some thoughts:
If all your music is on your hard drive, and you are working on your laptop while playing music through your USB DAC, I suggest you get the music off of your hard drive and onto an external drive, because your hard disc gets hit a lot as you work on stuff, and this gets in the way of the audio signal.
External drive should use a different bus than your USB DAC, as I posted above.
iTunes does not load music into RAM and playback from RAM, it hits the drive where the music is stored (I think). JRiver has a check-box to playback music from memory, try checking this box to get rid of ticks and pops. Also adjust the buffering from the default 6 seconds to 10 or 20 seconds, if you can stand it. This is all under tools->options->settings.
Hearing a difference between lossless and lossy file formats is highly dependent on the quality of compression, the signal path/settings in the computer, and the quality of the system you are using, there are many, many variables.
I doubt you need special drivers, Windows 7 supports audio output up to 24bits/96kHz. If you get into some 24/192 or 24/384 high res files, from HD Tracks and the like, you might need special drivers, depending upon your DAC.
One more thing, at the risk of angering the budget audio gods, I have found that the USB cable counts. Big time. I have heard a vast difference in sound quality between USB cables in my system, I suggest Pangea PC, they are cheap, $25 for 0.5m at Audio Advisor, silver plated copper cable. You can return it if you don't hear an improvement over stock USB.
Sheesh this post is getting long, sorry about that. JRiver will also auto-detect the bit rate and sampling rate of your music track, and will adjust its output to match. iTunes will not do this. If you are only running 16/44.1 music rips, do not allow Windows to up-sample that output. Let your DAC do it, and set windows to output 16/44.1, if your DAC will take it. You want the computer doing as little as possible to the audio signal, turn off all processing.

I knew that applied for digital coax, was not sure about USB, Steve. I have had recommendations for short-as-possible USB cable from other designers of USB/SPDIF converters. I've skimmed your white paper.

Jsd52756, you're welcome, Wavelength also has a page with setup tips,

http://www.usbdacs.com/Windows/Windows.html

and don't forget to also visit Empirical Audio's page link, posted by Audioengr above.