The software converts the AIFF to Apple lossless before it streams it and the AE coverts it back to 16/44.1.
Herman, could you elaborate a little bit on how AE does any conversion, if any at all? AIFF and Apple LossLess are both 44.1kHz/16-bit resolution but their data transfer rates differ, perhaps this was what you were referring to.
Kbigelow, I agree with earlier recommendations, the AppleTV+DAC+contoller (iPod Touch, iPad, or iPhone) is an excellent solution at a very comfortable budget even if you buy a new iPod Touch (lowest model, 8GB) to use as remote control. This solution is perfect for those who may not need a NAS at this time, perhaps because their CD collection is not that large yet (maybe <500). 160GB can get you a long way even at Apple LossLess or AIFF formats.
I use Sonos for a music server system but also have an AppleTV dedicated to a television setup and it's great device as a music server as well.