(sorry for the long post...)
Kaliar said:
At the moment the files are stored in bit-perfect format on your hard disk drive, the most difficult task of any CD player has been done !
One note about this: bits on a hard drive don't stay in one place after they've been stored once. Your OS moves them around as it sees fit. Moreover, a physical hard drive head has to locate and read the material that is stored. When the head then tries to deliver those bits at whatever sampling frequency you specify, there's a possibility it will drop some, particularly if they are scattered throughout your hard drive. Use of a RAID, like Mr. Hogan mentions, should eliminate this possibility; short of that, a good drive defrag program (such as SpeedDisk) will do the trick too.
I'm contemplating a similar system to SugarMedia's, running a music server on my desktop iMac with a dedicated external drive for media storage, then AirTunes. My aim is to take our laptop anywhere in the house, pick a playlist on it and hear music where I am.
In my current thinking, though, this won't interface with my main music system. Basically, I expect the times when I want the flexibility afforded by this kind of system to coincide with the times I won't need (or can't reasonably attain) hifi. In my living room with guests whose voices I want to hear, on my back porch watching my kid play, or in my car, it's great to have tons of music at my fingertips but I'm not 100% concentrated on it. Getting to retreat to my listening room is then all the more special (it's sort of a Zen thing, I guess - "When you listen, listen. When you entertain, entertain").
Therefore I'm not worrying much about compression or audio equipment through the house - MP3s and powered bookshelf speakers will probably suit me fine.
I do wish iTunes let one add a bit more custom metadata - I have lists and lists of songs with great guitar solos, songs about food, songs that correlate in other user-defined ways, and I'd love to be able to simply filter based on such metadata and auto-build a playlist on the fly (say for a joint cooking exercise with friends). Because of this I'm also considering home-brewing a MySQL / PHP music server; I have a copy of Mac OS Panther for Unix Geeks for just this purpose but haven't motivated to start yet...