use lossless format and tweak the audio system from there. dac is one possibility. a good tube dac may not cost much and should change the sound.
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Search the Squeezebox forum under the Audiophile section. There is talk about installing some plug-ins/software optimizing the server to improve streaming quality. I haven't tried them myself yet, but from reading the postings it supposedly does make a difference.
One setting on Logitech Server software that I did make which I found on SoundCheck's blog is the setting the decoding file type for FLAC
AIFF - Disabled
FLAC - Disabled
PCM - FLAC
Doing this will have the server decode (unpack) the FLAC file so the SBT doesn't have to do the work. I recommend checking out SoundCheck's blog also for more recommendations.
A lot depends on where you are coming from. If you are trying to beat a high dollar cdp with the Touch, you will definitely need an outboard DAC. If your digital front end is somewhat modest, you will be fairly impressed with the converter in the Touch. Either way, I still recommend adding a better PS.
Here is what I have done.
1. Boulder Mods to Touch.
2. Boulder Power supply.
3. Zu Mother Power Cord to Boulder power supply.
4. Power supply plugged into my Synergistic Powercell.
5. Boulder upgraded umbilical cord.'Nitro"
6. Morrow Audio D4 digital cable with Eichman silver RCA's.
7. Using Dac section from my Cary 306 SACD.
Here's my SB Touch set-up
1. Boulder Power Supply.
2. VH Audio AirSine to Boulder power supply.
4. Power supply plugged into Hydra 6
5. Boulder upgraded umbilical cord 'Nitro"
6. VH Audio Pulsar Ag SPDIF with WBT NextGens.
7. Stello DA100 Signature DAC
8. Dynobot's software mods to SB Touch
Next step is to send the SB Touch in for the Boulder Digital only mod.
This arrangement has unlocked my digital music collection formerly trapped on a laptop in my home office that dedicated to music only. This laptop also serves as the basis for my headphone rig in my office - of course, SB Touch and headphone rig are never "on" at the same time.