Confusion about digital audio handling in Apple eco-sphere

Confusion among Apple users. We need some answers about bit rate and word lengths in the Apple eco-sphere. This is the source material we have today:
CD 16/44.1 -> iTunes rip at 16/44.1
CD 16/44.1 -> iTunes rip at 16/48
HD audio 24/96 -> iTunes 24/96 downloads (maybe in FLAC or WAV converted to AIFF or ALAC?)
On the Mac lots of things happen with audio:
1 Conversion programs are available for CD ripping and file format changes. I have a small contribution to this part of the confusion, I purchase FLAC files and convert to AIFF using the program XLD, which seems to me to be ideal. Others may have different solution. iTunes also has a good reputation for direct CD ripping.
2 The setting of AudioMIDI (number of bits and rate) can be changed for the output up to 24/96, what effect does this have? I know for certain you have to restart iTunes if you change the settings as it reads them only once at startup.
3 Playing a file with a different bits/rate may or may not up-/down-sample. For example with AudioMIDI set to 24/96, what comes out when you play a 16/44.1 file? And vice versa, play a 24/96 with AudioMIDI set to 16/44.1, what comes out? Is it the setting of AudioMIDI that defines the output itself or the setting iTunes reads from AudioMIDI when it starts up?
For example if I start iTunes with AudioMIDI set at 16/44.1, then change it to 24/96, does iTunes continue to output 16/44.1 or does the system up-sample to 24/96? And vice versa.
4 Now the confusion gets worse if you stream the files to an Airport Express or New Apple TV. What conversions does iTunes make, does AudioMIDI have any effect, what is the bits/rate spec for the stream,is this different for Ethernet wired or WiFi connections, what conversion do the AE or ATV do, if any, and what does it output for each of the stored file types.
We need a complete and clear description of all of these issues so we can resolve the many, many discussions that are on the forum.
Any volunteers to prepare the manual?

I have had no issues with the D3 and Apple TV working after sleep. Indeed, there is no data connection between the two except that the Apple TV sends a laser based digitial audio signal to the D3 for DA conversion. The D3 does not communicate with the Apple TV and the Apple TV does not signal to the D3 that it is asleep or awake. The D3 just sits there and waits for the light to come in for conversion to analog.
I suspect your problem is in the Apple TV. Perhaps you have a bad unit and need to get a replacement under warranty (ASAP if still under the 90 day but hopefully you bought the Apple care 1-3 year warranty with it?) Regardless, even out of warranty, if you make an appointment with an Apple store via the web, show up, very nicely tell the Genius Bar person that the toslink feature seems to never have been working (does not matter that it goes to a D3 or a $6000 DAC so don't mention it!), they will check your warranty, see that it is bad, and 9 times out of ten, hand you a brand new Apple TV unit! They take the old one back, refurb it, and resell it. No one looses. Be nice the whole time! Even if they say you are out of luck, just be nice. Nice really works at the Apple store!
The other issue that might cause this is syncing. If the D3 or Apple TV are hooked up to a power strip that shuts off to save power (or that you shut off manually), this might unsync the two. So leave both on power lines that always remain on. That's how I have mine set up.

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