Is this setup possible

I will try to figure out what your trying to do.

1. Move your iTunes Library over to TC and configure your iTunes to use the library file from your TC and not your MB (laptop).
2. Use the MB (laptop) downstairs using your iTunes to retrieve music from TC which stores your iTunes Library.
3. Connect AE to your stereo so that i can access music from the TC.

Is this what your trying to do ?

If so, here is my experience.

1. You can move your entire library collection over to TC and configure your iTunes so that it points to TC for its files. However when your TC is not visible to iTunes, iTunes will create a local file on your HD. Which means that you have to repoint to TC when you are within your own network.
2. This is possible but there may be a lag if the connection is not good.
3. I dont know what kind of stereo you have but in order to access your iTunes library, you need a stereo that has iTunes on it. So the answer would be no.

 

Have you hooked up the laptop to the stereo to see if the audio quality is acceptable first (assuming it has a usable output)?

I ask, as you may need to get a USB or FW based device. A DAC is needed in the path to decipher the digital data into analog audio. Unless the stereo system has a decoder (DAC) built in. I've no idea how to help any further, as you've not given any specifics on equipment (laptop or stereo at least).

Other than that, I think it will work, but as FarSeide commented, the network connection would need to be good or you'd get drop outs.