What Linux distribution are you running?
Several recent distributions dropped the "/dev/dsp" sound devices support which is needed by DSD. Any Ubuntu later than 10.04 just to mention an example.
To check whether this is the case try doing:
ls /dev/dsp*
if you get a list such as
/dev/dsp
/dev/dsp1
that's the list of the available sound devices that you can use with the -i and -o flags. Built in sound card will probably be /dev/dsp and the usb one /dev/dsp1
If you don't get any entries, there's three possible solutions:
1- reinstall your pc with an older distribution
2- patch and recompile DSD as explained in another recent post here, in order to use it via the padsp wrapper
3- recompile your kernel with OSS support
Number 2 is the fastest, number 3 my favourite as it allows to upgrade other parts of your system while maintaining backward compability.