Instead of considering one of the high end media players like the Olive or Escient, I thought of connecting a dedicated external 500 GB USB drive to my iMac and loading all my CD's in FLAC or Apple lossless (is one better than the other?) and using my Apple TV to stream the music. Until now, I've used MP3 or AAC compression, which compromises sound, but with a dedicated drive, I could increase file size and fidelity.

Would this give me the same kind of performance, other than streaming issues, that the high end media players claim to provide?

I could add a high end DAC some day to improve things, but now it's really to gain access to hundreds of CD's I've forgotten we even own since they stay shelved rather than played.

Unless your feeding your Apple TV into either a standalone DAC or a receiver to process the digital sound, the analogue sound from the Apple TV is not the best you can obtain.

Also, the digital output from Apple TV is 16 bit, 44.1Khz and from reading other posts on the Apple form, there is no way to change that. A decent DAC will improve the sound significantly.

My setup is an external hard drive on my iMac using apple lossless with very good results. Other will have their own opinion on what may best but your ears have the final opinion.

Although I have tried the Apple TV, I went with the SqueezeBox 3 with an external DAC with the same result as with the Apple TV to external DAC. The reason for the SqueezeBox was so that I can still see what is playing without having to have the TV on.

If CD material is the only source for the library, why is 16bit/44kHz a limitation?
I don't think there are external decoders for FLAC and/or Apple Lossless, so you would have to decode on the Mac.
How good the analog output is depends primarely on the audio chp.
I don't think a computer outputing analog sound would ever qualify as audiophile player...

Please clarify:

If the computer rips the CD into Apple Lossless or FLAC format, doesn't it remain in digital domain when streamed to Apple TV (or Squeezebox)?

The media player then has to do the conversion to analog (though it outputs a digital signal to amp), right? It's the media player's onboard or an outboard DAC that would convert to analog? (Not the computer.)

You are correct, the media player uses their internal DAC to convert to analog. The digital out of the mdia player is converted by an external DAC or receiver.