Using Airport Express/AirTunes.

Streaming either wired or wirelessly from a Mac to the Airport Express, then via the optical mini-Toslink jack on the AE to an optical input on a DAC works very well.

That does, indeed, bypass the internal DAC of the AE and there is no impact on Apple Lossless files.

The usual recommendation is to use a glass Toslink cable, I have one I bought from an audiogon member who no longer sells them here but there are other sources, I've seen the Sonicwave cables sold on Amazon recommended highly.

If you're going to stream wirelessly it's definitely worth ensuring that both the Mac you use and the Airport Express you get have 802.11n capability, rather than the older 802.11g standard. Newer ones all do and that helps ensure you won't have interference issues.

Sfar, I agree 802.11n is the best option since I have dropouts with 802.11g (on occasions only). 802.11n is using 5GHz (5MHz in my previous post was a typo) - less polluted band far away from microwave ovens and cell phones.

Kijanki - yes, I had problems with interference from a microwave oven when I first put in an older Airport Express but was able to fix it in that case by switching channels from within the Airport Express utility application.

If I remember correctly the default channel on installation is 6 but changing it to 11 solved the problem with my particular setup.

I've also had rebuffering problems with the Touch, and I believe it is a known issue. In my case it was probably in some of the network settings I had (which were mostly default). I spent some time going through all my settings, and my Squeezeserver settings, and eventually figured it out - not a hiccup since after several months. It was highly annoying when it was going on though, rendering the system useless. Regrettably I do not know exactly which setting did the trick, but if you Google the issue you may find some suggestions. I would point out that it not exclusively a wireless network problem, as I initially thought it was (and tried many of the things being suggested here). It may have had something to do with the buffer/streaming settings. All the suggestions about wireless are absolutely spot-on in being possible solutions, but none of them solved the problem for me. The OP indicated that he has the same problem via Ethernet as well, so I'd say you could probably rule the wireless solutions out.

I've used the AE and prefer the Touch in virtually every way, especially sound quality, both as a DAC and streaming digital data to a DAC. The AE always seemed to compress both dynamics and soungstage (at least that's how it occurred to me). Per Kijanki you will not be able to get full resolution from hi-rez files via AE (No problem via wireless on the Touch). It would be worth it to take the time and effort to sort out the problem with the Touch if you have the patience, or can enlist a friend who is fluent in Geek to go through your network and Squeezeserver settings with you. Definitely put a stress on the fact that the problem occurs with Ethernet as well as with wireless.

My experience with the Airport Express and a DAC has been better than Jax2's. Comparing the output from the AE with the same music played from the original CD using a transport and the same DAC there's very little, if any, audible difference to me.

I have never tried a Squeezebox Touch, however, so I can't comment on whether it might be a better solution for you and I don't yet have any high-rez audio files so that's not an issue at the moment.