Digital recording, by its very nature, is lossy. Sound occurs in waves, and a digital recording can only approximate those waveforms. That's where the sample rate comes in and that's why many audiophiles weren't happy about the introduction of CDs; they didn't think the sample rate was high enough. CD players can use oversampling to smooth out the digital stairsteps, but in the end, that's no different than an upscaling DVD player. You can't reintroduce detail that's been lost; you can only approximate it.

DVD-Audio and SACD represent very good improvements in digital audio because they have a much higher sample rate than CD, reintroducing that analog "warmth" so many people claim is missing from CDs.

To my ears, the best audio I've heard is newly pressed vinyl produced from analog master tapes. The DVD-Audio recordings I've heard come a close second.

I can't hear a difference between AAC files I've encoded with iTunes and the original CD recording, but I do think DVD-Audio sounds significantly better than CD, and good vinyl sounds even better than DVD-Audio.