Howard -
I think you need to take the long view here and recognize that you are building the foundation for what will become your digital media network. Trust me this is insidious, once you experience the quality and convenience you won't want to go back to your wicked old ways...
You are actually off to a good start since you already have some first hand experience with the computer side of the equation.
Here is what I think you are asking about...
#1 - Assuming you are going to RIP in a Lossless format plan on about 10Mb per minute of music - so a CD is between 400 and 700 Mb (rare but happens). So - how many CDs you got? How many you likely to get? BTW makes no sense not to rip lossless - eventually you are going to want this in your big rig and MP3 sounds like caca at that level. Here is the mantra for the day - rip once, use many.
Point being that HD space is very cheap - go and find a deal somewhere like Newegg on a pair of USB2 or Firewire drives -one is your backup. You want a 7200 RPM drive with 8Mb buffer from Seagate, Western Digital, Maxtor, Samsung or Hitachi. All about the same. The better ones are sold for the near enterprise market (as opposed as to the consumer market), have slightly longer warranties (not helpful but an indication of longer MTBF) and only cost a few bucks more then the cheapies used as come ons by the electronic stores. If you want to save, put them in the case yourself. Make sure the case has a fan and substantial power supply (>30w)
It is not essential but I recommend a dedicated hard drive for your audio assets if you have a substantial library. Just cleaner and neater.
Ignore the useless posters who would only use Brand X or know for a fact that only Brand Y is any good for audio... it's a very competitive global market dealing in the millions of units, it ain't that hard and as usual you get what you pay for. It is so cheap now its not an issue.
#2 - The tricky part here is the wireless and what lives where - you will just have to try it to see how well it works in your specific environment. WiFi is a crappy, very directional radio signal so it gets fussy about walls etc (good clue - how is it working now - does she have good download speeds?)
Assuming you go with iTunes (see #5 below) the discussion and analysis you have to do is really between iTunes and Squeezebox (SB) since they will both let you do what you want to do at any given location in your home...
The big key here which is gaining huge traction fast is that in addition to your library she can listen to a bazillion radio stations for free or for a slight subscription fee (live365 etc) This is an awesome feature especially if a) your CD collection is limited or b) her tastes are eclectic. All that is required is a reliable internet connection to do the radio thing - the same one she uses to surf the Web and do her email.
A key difference is that SB can do this without using any computer resources - in fact the computer need not be on at all. If her machine is RAM limited this may be important. I would definitely include a RAM upgrade in the planning for this.
#3 & 4 - The SB or Airport device needs to be near the audio system not the hardware. Both the SB/Airport are network devices which need a place on the network with their own IP numbers BUT, and this is the key, they also have to physically interface to your sound system.
Meaning that you need to get an analog RCA pair from the SB/Airport to the preamp/amp (or a SPDIF to a DAC if you already have that gear) - so it probably wants to be near her unless the house is wired for sound. Sketch a diagram and you will see it immediately. Practically speaking this puts the device within 6 feet of the sound system.
If you go SB - She can control the SB using the dedicated remote (a distinct difference from Airport and a very useful thing if you are going to have multiple nodes), or from the free SB browser based app that looks a lot like iTunes.
If you go iTunes she will control things with the iTune app in her computer.
There is a volume control in both the SB and the iTunes software and a complete 'transport' interface to stop/start etc. She can select by artist, album, genre, playlist, shuffle etc in either application
Again you may want to look at upgrading RAM etc if she does heavy work or has an entry level unit. Its not a big processing load but the key with audio is no breaks - worse case she will hear something like a long dropout when she is hammering the computer with some other task and then you'll know you have to either live with it or upgrade the hardware.
As far as where the drives live. Using premium cables (for conductivity not sound quality) with USB you can go 15', with Firewire 30' so a nice handy closet in her office would be fine. The drives (the second one only needs to be on when you are doing backups) will be connected to a PC not the SB...
If you don't mind if the upstairs computer being on all the time, then you could certainly leave them up there - haven't tried it but should work - again YMMV based on your very specific WiFi conditions,
#5 - Is iTunes the best? If you have a Mac absolutely. If you want something bulletproof supported by a F500 company (OK so the help line is in India but there is one and chances are good you won't need it) that will continue to invest in the product, absolutely. If you want an elegant seamless integration of all aspects of PC audio - ripping, file management, and player control plus the opportunity to shop for music online, easily integrate album cover art, manage an iPod, burn CDs absolutely.
The really good news is that SB is totally compatible with iTunes so you can have a mix and match system using various devices as appropriate - remember the foundation thing at the top...
If you are a very fussy audiophool with abundant Windows computer skills, have time and patience or simply are someone who enjoys geeking about, and you want/demand the ultimate in playback and control, you can of course go into the wonderful world of freeware and shareware and roll your own. If you are on the fence, I suggest you spend some time on Audio Asylums PC Forum searching on topics like EAC, Foobar, FLAC, ASIO, K mixer, Secret Rabbit and the like to get a better understanding of what can be accomplished and what you will have to master to get there.
Very powerful to be sure but... Lets just agree that the guys who whine about iTunes and how much better EAC is are a)right in a absolute sense and b) the same guys who carry on about hard drive brands.
My experience, and the experience of hundreds of people whose posts I have read is that you can get 98% of the goodness with iTunes including a choice of lossless formats. Note that there is no combination of apps I know of which gives you the flexibility of iTunes - and if you have an iPod or two, you are going to end up with iTunes anyhow. Remember the mantra here is rip once, use everywhere...
PLUS iTunes gives you two other important options you have not mentioned or may not have considered.
First - you can put iTunes on her machine and connect her machine (via a USB device or worst case a soundcard) to the preamp and skip the whole network thing for now. Or you can use Airport Express as a networking tool, be wireless and forego the SB. For a single node/starter that is the most cost effective solution and it does not limit your options going forward.
As you evaluate the two, be sure to take a look at workflow - who will do the ripping and where would you prefer to do it.
Hope this is helpful - in many ways its easier to do then write about.
