I upgraded to a second generation Fiio X3 after owning the first generation for over a year. Here is my feedback after six weeks of use:

Sound quality is slightly better, more refined/sophisticated sounding than the first generation. Subtle details are placed better in the soundstage, but as others have pointed out, the sound is not as "sweet" as the first generation. It's a fair bit quieter, with a bit more nuance, and a better sense of space. I suspect that this is because of the built-in amp, and not the DAC.

Unfortunately, this is where the improvements begin and end. In every other possible way, this 2nd generation is a big disappointment compared to the first generation. Here are the most frustrating aspects of this player (rendered even more frustrating by the fact that the first generation did not have these issues)

- Scroll wheel. I have never been a fan of the ipod scroll wheel, so I would cite this as a negative even if this wheel was well implemented, but it is not well implemented at all. The responsiveness of the wheel is so frustrating that, in my opinion, it is almost unusable. The wheel has physical increments built in to its scrolling mechanism, so you can actually feel little clicks as you turn the wheel. This is supposed to give you tactile feedback to the scrolling you are doing. It would be a great idea if the increments/clicks actually corresponded with items on the list, but they don't. You would think that each increment/click moves the cursor down one item on the list, but it doesn't. Sometimes, when you turn the wheel and feel the increment/click, the device does not scroll at all, and the same item remains selected. Other times, scrolling one increment/click will skip an item and scroll down two items. So, sometimes one click doesn't move the cursor at all, other times it  moves it too far and skips the item you are trying to select, and only rarely does the wheel actually function as I imagine it is supposed to, with one click moving the cursor one item. There were many complaints about the first generation's button layout. I've never shared these complaints. While I thought that the first generation's buttons looked a little weird when I first received the item, it took me two days to get used to them. You have the option not to use the scroll wheel, but to use the button on the front, but even if you are using the buttons and not the scroll wheel, the button layout and button operations are actually a lot more confusing and less intuitive than the first generation. The first generation had nothing wrong with the button layout. It just looked funny so people thought it was weird. Anyone who actually used the first generation Fiio X3 for more than a few days would tell you than the button layout is actually very intuitive and functions very well. The second generation is designed entirely with the scroll wheel in mind. If you don't want to use the scroll wheel, the option to use the buttons appears to have been added as an afterthought because it's just not convenient to use.

- Playlist management. This is one of the most frustrating features of this player. As far as I know, there is no way to remove a song from favorites if the song has been deleted. It can only be deleted from favorites if you play the song, click the menu button, and toggle whether or not it's a "heart." If you have songs added to favorites, but the songs are no longer on the SD card, then good luck deleting them. The menu gives you the option to delete the song, but nothing happens when you try. Also, the self-created playlists cannot be deleted. It gives you the option to delete them, but when you try, nothing happens. This is a firmware issue, and I hope it will be fixed, but it is extremely frustrating because it's such a basic problem that there is really no excuse for this type of thing. 

- Screen responsiveness. Switching screens takes longer on the second generation than it did on the first generation. Backing out of the "now playing" menu to see the folder you are listening to takes twice as long as it did on the first generation. Every subsequent push of the "back" button also takes longer to reach the previous menu than it did on the first generation. This isn't a big deal, as it literally takes half a second, but it's frustrating to think that my first generation was better at loading menu screens.

- The amplifier is weaker. Powering my Etymotic ER4B, I have to turn the volume up all the way to 120, and it's still not loud enough for my taste. The amp in the first generation Fiio X3 was able to power my ER4B fine, but this is significantly quieter. It's fine if your headphones don't require much juice and all you listen to is brickwalled, overly loud CD rips, but I listen to vinyl rips and HDtracks, which are mastered significantly quieter, so I require an amplifier that can take a quiet track and bring it up to a loud enough level that it will sound good even with power hungry headphones. So, while the DAC in the 2nd generation is a more sophisticated sounding, the amplifier is significantly weaker. I am not into the idea of "stacking" this with a separate amplifier because I hate bulky items, so this is a significant shortfall. But it won't affect most listeners, who listen to CD rips and don't have power hungry headphones.

- Item is thicker. To me, it makes no difference that it's slightly shorter. It's thicker, which causes it to take up more room in your pocket.

- No internal storage. You lose 8GB of internal storage when upgrading to the 2nd generation.

Having said all that, I still think this is a good DAC and a great value. If I never owned the first generation Fiio X3, I wouldn't be making most of these complaints. I wouldn't have anything to compare it to, so I'd simply get used to the badly implemented scroll wheel and the annoying user interface and firmware issues. But when you consider the fact that the first generation of this player did not have these shortfalls, it becomes frustrating.

I recommend saving a $100 and getting the first generation.