External DAC vs. your quality processor

As I work on completing the path of music from iMac to Maggies there comes the issue of: Should I consider an external DAC or rely on the DAC in my Krell HTS7.1 to do the work. Perhaps others have dealt with this issue and discovered that, indeed, their processor handles the DAC work very well without the need for an expensive external DAC. Afterall, when you have spent big bucks on a quality processor it would be a shame to find out that you need to shell out more big bucks for a DAC because the processor under-performs. I'm also struggling with Toslink vs. USB.

If you have had similar decisions to make, your comments are welcome.
I found Benchmark DAC1 to be slightly cleaner than my HT processor alone using Toslink. The difference was small though. A friend of mine actually preferred the HT processor sound (it was less "articulate" or "recording" sounding or more musical to his ears). My suggestion would be to check yourself - get a DAC with a 30 day return policy and test and test and test - the nice thing about an HT preamp is you can usually level match to 0.5 db with a test signal for A/B testing and then switch from the listening chair using the remote to compare.
Shadorne: Out of curiousity, what processor were you using in the comparison?
Nothing as fancy as a Krell - see my Virtual System - the HT processor is listed there. FWIW: I can't hear the AtoD and DtoA loop in this processor and I have tried very hard to do so (So the AKM DAC's it has are probably ok for my tin ears). However, I can hear what is presumably the effect of interface jitter via Toslink input into the processor from a cheap CDP (although my friend preferred what I have presumed is a slightly more "jittery" sound - so it is obviously no slam dunk - coudl it just be a different sounding DAC?) I must be careful though - as you realize what I am saying is partly conjecture. That is why I say test and test and test yourself - make your own choice!
Shadorne: Thanks for taking the time. I appreciate your comments.
i have an HTS 7.1 in my theater and a DVD Standard driving it. Just comparing the 2 channel dac in the Standard to thw HTS, the dvd players 2 channel dac sounded much better. I was comparing the two channel performance through a transparent audio reference digital link (RCAs) vs the analogue out through balanced Ultra XL. Less grainy, very musical.

I'm currently working through a more similar situation where i am driving a Bel Canto Dac3 into a Krell 400XI via balanced connections. I brought up the dvd player as a point of comparison (again with the 2 channel analogue out of the dvd player using balanced connections). Ultimately i liked the computer/belcanto better, but there wasn't a huge difference...and the BelCanto is still getting run in (bel canto recommends 500 hours or so). BTW i'm also using a Van Den Hul glass toslink between the pc and the bel canto.

I'm sure others have worked this through... perhaps by the end of hte weekend they'll chime in.
Objective1; Thanks for the response - Just to be sure I have it right - can I assume then that in the computer to Bel Canto to Krell 400xi set-up that you prefer the DAC work in the Bel Canto to a more direct Computer to Krell (digital in) set-up because you feel that the Bel Canto offers better DAC work than your Krell?
I've heard a lot of processors and a lot of DAC's. I have yet to hear a SS processor that holds a candle to a good DAC. My Proceed AVP is not bad, one of the more musical ones, but nothing compared to a good DAC.
Awhile ago, I decided I didn't like the sound of SS processors for music. Since then, I discovered I like non-OS DACs or tube DACs, neither of which would make sense in an HT pre/pro.

It does seem like HT processors these days have become better at rendering music. I guess it really depends on what you're looking for in the 2-channel presentation.