The S1200 has a known issue where the digital DSP board fails. This is common on the earlier versions of the board. The "waiting for audio" message and static/poor sound were definitely symptoms of this. So, yes, I completely agree that the unit is defective. If you want to raise an issue with the seller and ask for return/refund, you are definitely justified.
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To fix this, Krell has developed a "Version 2" DSP board with newer chips (the old DSP chips were discontinued). You would need to submit a "Service Request Form" on their website to obtain a RMA number for shipping back. I don't know what the cost would be. My S1200 had the failed board from the get go (new in box) and Krell covered it as part of the warrantee. I imagine that It would probably at least be a couple thousand dollars.
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If you are wanting to keep this S1200 and try to work with it, I would test the 7.1 analog inputs first to make sure there was nothing wrong with the audio boards. If this is successful, you know is a DSP board issue.
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As far as the volume is concerned, I think that Krell made changes in the firmware and/or resistor ladder volume circuit with the new S1200. I had an HTS 7.1 processor (same generation as your Showcase) and I would typically have the volume anywhere between 17 and 24 (really damn loud). With the S1200U, I have the volume somewhere between 65 and 76. At 76-80 it gets pretty damn loud.
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To fix this, Krell has developed a "Version 2" DSP board with newer chips (the old DSP chips were discontinued). You would need to submit a "Service Request Form" on their website to obtain a RMA number for shipping back. I don't know what the cost would be. My S1200 had the failed board from the get go (new in box) and Krell covered it as part of the warrantee. I imagine that It would probably at least be a couple thousand dollars.
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If you are wanting to keep this S1200 and try to work with it, I would test the 7.1 analog inputs first to make sure there was nothing wrong with the audio boards. If this is successful, you know is a DSP board issue.
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As far as the volume is concerned, I think that Krell made changes in the firmware and/or resistor ladder volume circuit with the new S1200. I had an HTS 7.1 processor (same generation as your Showcase) and I would typically have the volume anywhere between 17 and 24 (really damn loud). With the S1200U, I have the volume somewhere between 65 and 76. At 76-80 it gets pretty damn loud.