Hopelessly mid fi?

I recently hooked up an 80 gb ipod to my system through an Apple dock and did an A/B with my CD player. I am able to match the db level between the two via the volume control on the CDP, and switch between sources instantaneously for a meaningful comparison. Much to my chagrin, the difference was minimal at best. So I brought in a Squeezebox and hooked a digital IC into the CDP's DAC with similar results using both compressed (AAC 192) and Apple Lossless formats. From what I have read on this site, I assumed that it shouldn't be possible that compressed or streaming digital should rival the sound of, by all accounts, a reputable CDP (name intentionally withheld). But it does.

Is it possible to assemble a digital front-end, for say, less than $2K, that would produce a meaningful improvement over both the ipod and Squeezebox? An external DAC perhaps? Or is my system simply not capable of resolving the differences? I'd prefer not to overhaul the rest of my system if possible which includes an Odyssey Candella preamp and Extreme mono amps, Von Schwiekert VR-4jr speakers and Virtual Dynamic Nite II cables.

Thanks for your thoughts.