Understanding Signal Path in PC Audio

audio sounds pretty bad through the headphone jack of my Sony VAIO notebook

iTunes is sending its digital stream through the DAC in your Vaio's soundcard.

does the USB port somehow output a digital stream and there is a cheap DAC inside my plastic Creative box?

Yes, it's always digital info going out the USB port, and your Creative is handling DAC duties.

Ultimately, I want to rip all my CDs onto a big hard drive, bit for bit, and export them with the lowest jitter or whatever into an audiophile DAC.

Depending on your computer and your choice of other components, like the external DAC, you would send digital data out from the computer through a USB, Ethernet, optical (Toslink) or wireless port. If USB, you can find a handful of USB DACs that will allow a direct connection from computer to DAC. Optical out will allow direct connection to many DACs. Alternatively, you can send the signal through USB, ethernet or wireless from the computer to an appropriate converter (like Squeezebox or Airport Express) that outputs SPDIF and then cable this converter to a DAC.

There have been a few much more detailed explanations recently, but I hope this gives you the basic picture.

If there is digital in and stereo analog out, then there is a DAC in the box.