Tuneman, really, I don't even remember if the Touch will play 24/192 files without the "Enhanced Digital Out" third party application. If you are getting an unsupported file error with 24/192 files, you should try installing the "Enhanced Digital Out" third party application.
As far as having your server (whatever it is that you may be using) doing the decoding, your success is going to be dependent upon your setup.
If you are feeding files over a wireless connection, you may run into problems because sending the decoded file over the network takes up a lot more bandwidth. If you run into problems having your server doing the decoding, just leave the setting so that the Touch is doing the decoding.
I have my NAS and Touch on a wired network and have never had any problems having the decoding done on my NAS. I use a Synology Disk Station.
As far as having your server (whatever it is that you may be using) doing the decoding, your success is going to be dependent upon your setup.
If you are feeding files over a wireless connection, you may run into problems because sending the decoded file over the network takes up a lot more bandwidth. If you run into problems having your server doing the decoding, just leave the setting so that the Touch is doing the decoding.
I have my NAS and Touch on a wired network and have never had any problems having the decoding done on my NAS. I use a Synology Disk Station.