I would suggest both a linear power supply AND internal mods

The stock power supply is a switching design. It produces large amounts of noise into the AC line. This can adversely affect all your audio components plugged into the wall.
The switching noise will also be present in the DC lines inside the SqueezeBox. As the sp/dif output signal is made from the DC going into the chips, this noise will also be in the digital output into your DAC. This may cause some errors to be read.
The mods to the SB are made to reduce noise internally generated by the SB. The mods also address the impedance mismatch caused by using a standard RCA connector and output lines on a circuit board rather than a true 75 ohm coax.
Both the linear power supply and the internal mods will improve the sound of the digital output. The linear power supply is what I would suggest as the first step. The internal mods will improve upon that step.
Other comments by folks who have had their units modded are very welcome.