The original SqueezeBox had a text-only display. There was a later revision to change the display to support graphics.
The SqueezeBox2 improved the display resolution and improved the quality of the digital output. Slim Devices made it a priority to make the SB2's digital output as good as a high quality transport.
The SqueezeBox3 was largely a cosmetic change from the SB2. The SB3 has a larger screen and also supports 802.11g (54 Mbit/s wireless) while the SB2 was limited to 802.11b (11Mbit/s wireless). There were some additional electronics changes, but for the most part the SB2 and SB3 are equivalent in terms of sound quality.
I have one of each (original SB, SB rev2, SB2 and SB3). I still use all of them, but keep the older versions for background music (garage, outdoors, etc.).
-Rob