2-channel with Direct 5.1 sounds great What now?

Hi folks.
I've been gradually upgrading my system over the last few years. As one can probably tell, the system is set up for home theater, but, I am more concerned with 2-channel sound than I am with movie sound. I frequently read through the forums and member reviews and frequently have seen folks write about using 5.1 direct to by-pass any digital transformation of the signal. While looking through my 1050 manual, I found that I could do that also. Over the weekend I changed the connection on the 1050 to use the 5.1 direct (although it actually is 6.1 on the Outlaw), popped in and listened to a few cd's (jazz) and couldn't believe the difference in sound. It is like I am hearing a lot more clarity or detail, especially in the drum cymbal work, acoustic guitar, etc.

This has got me wondering about how much better could the system sound. I'd like to retain the home theater ability and I'm wondering if there is much to be gained by moving to a older higer end processor that I could afford. (I've seen many in the $400 - $700 range that were expensive when new.) Or would I be better off looking at replacing the cd player or something else?

Any thoughts?

Current system includes:
Outlaw 1050 receiver (powers center and surround)
PSE Studio Mark IV amp (powers the Thiels)
Thiel cs 1.5 speakers
NAD c540 cd player
Audioquest copperhead interconnects from cd to receiver and then to the amp.
Speltz anti wire speaker cables to the Thiels
Pioneer dvd
Def Tech subwoofer
Klipsh center channel
Really cheap surrounds, and other interconnects and wires.
No surprise that '2 channel' performance has improved with 5.1 Check out Toole's new book 'Sound Reproduction' He provides a good explantion of why you are experiecing better sound.