A DAC is a device that converts an unlistenable digital signal to a listenable analog signal (once amplified and sent to speakers). Your iPod has one in it. Your receiver has one in it. You can get an external DAC for devices (amps) that don't have one.

Is your Onkyo TX SR603X the right receiver for you to listen to music on? I have no idea.

Are there better receivers to listen to music on? Absolutely. Are there better choices besides a receiver to listen to music on? Yes.

Unfortunately I do not know much about your goals, though you do seem to want better sound based on how happy you are to have upgraded your DVD player.  I don't know much about your budget, or anything else for that matter. I would suggest reading more about equipment and hifi systems on audio forums, or even Stereophile magazine, to figure out what you want. That's what I do. Your question seems kind of broad to be able to provide much in the way of useful answers..

Painfully typed and sent from my Galaxy Nexus

is a pair of emotiva upa 1's to power everything. these are 200 watt mono blocks and you can get them on sale for 299 a piece when they go onsale this spring. it's the cheapest best way to give you lots of clean power at a good price. you could even go with the emotiva usp 1 pre amp too for under 400 dollars when it goes on sale. for your choice of speakers you're on your own. there is so many different makers of speakers. just get something with paper cones, not polypropylene or aluminum. good luck www.emotiva.com i'd also advise  running your cd's through a regular cd player rather than a dvd player.

A pair of Parasound Halo JC 1's and Revel Ultima Saloon 2's. There's a nice Bricasti M1 that's just been reviewed also.  Oh wait.  Never mind, I actually don't know what he needs.  That's stuff I need. 

Take a listen to the Maggi MMG's ($600 a set) and by far the best speakers at anything like twice their cost. They just need a good bit of power to open up.

The only problem with having your music on your iPOD is that the iPOD does not support Hi-Rez files (better than CD Quality)...When anyone says 'iPOD' I hear MP3 and that is not serious music quality. If your iPOD is loaded with bit perfect CD quality files, the iPOD can be made to sound pretty magic (with a dock and an outboard DAC)...

IMHO, the DAC in the iPOD is pretty basic and getting dated. The iTunes way to connect the iPOD to the computer for data transfer is also primitive. My Android phone is easier to use for music and, with teh poweramp app, sounds better through headphones than my iPOD classic.

So, to cut to the chase...If I was you, did not have vast sums of money (and you did not give any spending limits) I would go with the Emotiva gear suggested and add two things, an iPOD dock like the Wadia 170 (on sale at music direct) and an outboard DAC like a DACMAN or this newer one

http://www.audioadvisor.com/prodinfo.asp?number=PTDACIT

You would need a pair of amplifiers if, like mentioned above, they were mono amps. Most likely people would just get one stereo amp.

You could replace your reciever with an amp, it just depends on what kind of setup you want. That I don't know.

OK, I just read your post before.

The iPod outputs an analog signal using rca cable or most docks. In this case, your sound quality is limited by the DAC in the iPod. You can still get better sound by getting a better receiver or amp, plus speakers.

The advantage of the Wadia 170 is that it bypasses the cheap DAC in the iPod, so the signal can be converted to analog by a higher quality DAC.

A receiver and an amplifier both amplify the signal to power speakers. A receiver just has extra functions that you may, or may not need. In very general terms, amps often have better sound quality for the price, since you are not paying for the extra features in the receiver.

I use a netbook computer for internet radio (and most of my music). This feeds a separate DAC, that feeds an amplifier and speakers. There are other types of devices that you can use as a source for internet radio, but that's really not my field, and someone else can probably help with those.

Vinyl is the popular analog storage medium, though traditional tape recorders were analog as well, though now we have digital tape recorders.

The Pure i-20 is another device besides the Wadia 170 that can extract the digital signal from an iPod, and it goes for $99 on Amazon. Both it, and the Wadia contain a DAC, and can output an analog signal, or a digital signal to feed an even higher quality DAC. Whether you think the cost of one of these to reach potentially higher sound quality is worth it, is hard to say.

Your Onkyo receiver is not a bad component, but it includes 7.1 channels of amplification, plus a DAC, and other audio/video circuitry for its original $499 list price. If you need the extra amplifier channels, and circuitry, then OK, but for just music, it's just extra stuff.  A dedicated two channel amplifier won't be an earth shattering difference, but should be better.

Emotiva has become somewhat popular for mainstream audio components since their inception a few years ago as an online-only manufacturer/retailer. They have developed a reputation for high value components at the modest price level.  There are many, many other choices though.

Decent quality entry level amps start at about $400, and deals can be found. Prices can rise from there, with the sky the limit. You can look at the Marantz PM5004, NAD C316BEE, and Cambridge Audio 550A as starting points for example.  A good place to see some choices are Audioadvisor.com and Musicdirect.com

When you get to speakers, there are even more choices to be made than with source components and amplifiers. And most people will prefer the sound of some speakers over others without regard to price, so listening to a speaker before buying is highly recommended. Once you have your iPod sorted out, I'm pretty sure the replacement of your Bose speakers will probably give you the biggest improvement, though you didn't say which Bose speakers you have.

Once you get a good quality signal from your iPod (analog or digital) or internet radio, then for the most part, the better the amplifier and speakers, the better the sound. The higher the price, the better the sound, is a general rule that doesn't always follow exactly. For example, in amplifiers, more money can buy higher quality sound, or more power, or some of both.

It's a little tricky to balance things out between the source, the amplification, and the speakers to get the best sound for the money. Most of us spend a lot of time trying to figure out which component to put our money into next, for the best improvement. You are not unique in this, haha