AppleTV work with USB DAC?

Don't think it can be done. BTW, the ATV does have a fan, when you pull the plug you can hear it spool down. I currently have an ATV connected through optical to a Theta TLC and then to a DAC and am happy with the sound. My main issue with the ATV is it very frequently hangs up and needs to be restarted, in particular after getting the new version of Front Row. Thinking of the Mini but it doesn't sync the same way as the ATV to use the Remote and has HDMI/component so video out is pretty straight forward. Now if I could only get a combination of the two.

You're probably right, it might be the hard drive. Would be interesting if a SSD was put in. I recently resolved most of the performance issues by moving away from a NAS and installing a larger drive in my iMac, mirrored using SuperDuper, but that's another story, but since I know my ATV is fine, I probably won't be looking at replacing it.

In terms of the output, even if USB could be used, it seems like there are a lot of debates on the quality and implementation. Maybe you can look at just getting the best out of the Toslink. A reclocker like the Pace Car might be an option. One thing that I'm really curious about is the Altmann UPCI (Ultra Precision Clock Injector).