Apple TV ethernet wired server

I have my gen 1 ATV connected to my TV via HDMI and audio via toslink without any issues.

Let me see if I get this--Apple TV won't pass a High Res (24/96 or higher) file?

if you don't hear any difference between an apple tv and your music server, then you need to work on your music server.
some of the reasons are:
* apple tv is only good for 16/44 files
* you are not running pure music or amarra on the server

if you stream music from a server that is running these 2 products, you have to turn off the program to send the data remotely to an apple tv (i think it is still this way). i'm not saying that you will get bad sound from an apple tv because you can take the signal and put in a jitter device and an external dac behind the apple tv and it will be better than without, but it will not be as good as what the server can produce. the other alternative is to get a used mac mini and connect that to the music server. this doesn't have the 16/44 limitation and pure music will allow sending the pure music read data to the external mac mini.

It is my understanding that once HDMI is connected on the AppleTV the digital out signal is nul -

I do not have a wireless network and connect my 1st gen ATV via ethernet to download.

"accept files via ethernet, or only by streaming. I would prefer the wired connection."

Streaming is either by ethernet or wireless. Both original and 2nd generation Apple TV's stream music via both wired (ethernet) and wireless. Not sure what you mean by "accept."

The original Apple TV had a hard drive that allowed you to physically move files like music or video onto and play directly. The current 2nd generation Apple TV does not have a hard drive so streaming music from another source, such as a computer on the same network is the only way the 2nd gen Apple TV plays music.

I have not heard an audible difference between playing files directly from the hard drive on my original Apple TV, streaming them to my original Apple TV or streaming them to my 2nd gen Apple TV.