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If you are getting sound from your PC it has a sound card. It may be integrated in the motherboard but if you get sound from your computer's headphone jack it has one.
What is the manufacturer and model of your motherboard. If the sound facility of the computer can output a digital signal to USB, then you could get a good DAC which should improve things and would almost certainly be warranted if switching to lossless files.
The Audioquest Dragonfly DAC is quite good. What do you consider a "fairly small budget"?
I have an Asus M4A88TFD-V EVO/USB3 which has a Realtek ALC892 audio chipset.
I was hoping to spend around $100, but I am realizing that may be unrealistic.
using the internal Realtek audio DAC. I believe the computer can be configured to output digital audio to a USB port. There is also an optional SPDIF module that will provide a optical digital output. Even a $100 standalone stereo DAC is probably better than the ten DACs squeezed into the Realtek ALC892 audio chipset.
DACs under $200 worth considering:
NuForce Icon uDAC
HRT HeadStreamer DAC
Audioengine D1 DAC
HRT Music Streamer II
HRT iStreamer DAC
Firestone Audio - Fubar 2 Mk II - USB Audio DAC
Some others I can't think of.
Again, the Audioquest Dragonfly for $250 is a real winner.
Assuming you have a home wifi network (Wireless-G or N), I'd buy an Airport Express off eBay for $30 and use the analog output from that to get started. Save up $200-300 and buy a DAC with optical and USB inputs, which you can connect to the AE or directly to your compouter.
I'd also subscribe to iTunes Match and upgrade all of your "matched" MP3's to 256kbps AAC files. Even with an expensive high-resolution system, you will be hard pressed to tell the difference between 256 kbps AAC and lossless.
im going to hold off on the airport express. i have another project to make a home server for media streaming.
I think im going to go with the NuForce Icon uDAC. if i cant tell the difference between that and the mobo DAC i can always return it!
thanks for the help