I have the same problem and am as yet undecided. I have tried three
olders DACs from ebay all without luck. Two of them sounded so much
worse than the squeezebox it was shocking. The trouble is, I have
found, that an external DAC has a disadvantage compared to onboard DAC
due to jitter problems in SPDIF. This is why the external dac market
never really took off in the home market. As a result it may not even
be possible to find a reasonably priced DAC that does a good job. I
don't know yet. 

The fairly expensive
http://www.musicalfidelity.com/products/smlx/xdacv3.html is a modern
dac with PLL jitter reduction and it gets good reviews but it's much
more than a squeezebox and you are supposed to buy an exteral power
suppy as well. I havn't tried it myself.

If there were simple changes to the SB3 to make it better quality (eg
replacing the power supply) I would be very interested. There is a web
site making mods but not sure if they work.
http://www.boldercables.com/servlet/Detail?no=371


-- 
willyhoops
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