In reviews and articles I've read for certain external DAC's like V-DAC or DacMagic, I've noticed the reviewer mention he tried the DAC connected to different CD players and had different results. It was my understanding that when a source is connected via digital out, that it is just that. A source. If no digital to analog conversion goes on in the source, than why is does the DAC sound different when connected to different sources? To save money, I was going to buy an external DAC and connect all of my current electronics to it (computer, DVD player, DVR, etc...) I don't have cheap electronics, but they're certainly not top of the line. Does connecting the external DAC to a cheap piece of equipment defeat the purpose of having the expensive DAC, or is it still worth the money to do so?
Because bandwidth limitations in the cable and departures from the specified output and input impedances of the source and DAC, respectively, introduce timing uncertainty in the exact transitions between the high and low signal levels in the datastream. (The transitions define the ones and zeroes, not the high and low voltage values.) This timing uncertainty is called "jitter" and it is something I measure in all Stereophile's digital reviews. There are many technical articles on this subject in the "Reference" section of the magazine's free on-line archives.
It depends totally on the jitter-rejection properties of the DAC. Again this is something I measure in every review.
Would I be correct to assume that the better the external DAC you use, the less the source will affect the overall sound?
Better in terms of what? Jitter rejection, of course, but there is no direct correlation between price and jitter rejection. Again, I suggest you look at the measured performance of the DACs that have been reviewed by Stereophile if thee is one in which you are interested.