How do I use dedicated storage and iTunes?

It's pretty easy to do this.

Copy your entire folder "iTunes" to the external USB or Firewire drive. Depending on size, it might take a while.

In iTunes preferences, click the Advanced tab, and in the area that says 'iTunes Media folder location', just to the right, click Change, then point to the new location.

You can also split your collection into multiple libraries, i.e., one for Classical, one for Jazz, etc. When starting iTunes, press the option key while you start iTunes, and it will ask you which library to select.

You DO know that your Airport Express is limiting your sample rate to 16/44.1, correct? Is that why your upsampling at the DAC?

Thanks to all who responded. There seems to be a consensus here and I just ordered a Synology 2 TB NAS and will then move the files to it. To answer Rhanson739's question about AP Express being limited to 16/44.1, yes, that exactly is why I'm using a Cambridge Audio DacMagic up sampling DAC. I also recently purchased a Pangea Power supply for it and that made an immediate positive difference in performance.

Great, Tarraga. Sounds like that setup will work well for you.