OK, if it is clipping, then you will be introducing some distortion. It may be that your input streams are at a high level (perhaps using some kind of automatic gain). Try reducing the volume of the mixed stream a little (e.g. multiply every sample by 0.75) before it gets converted back to 16 bit.
I don't think DirectSoundOut should be causing a problem, but it should be very easy to swap in WaveOut or WaveOutEvent to see if that makes a difference.
Mark