I am not familiar with the Rotel RSP 985 so I do not know how good the dacs are. I have owned both the Rotel RDD 980 and the Cal Delta, and there are better transports out there.
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If you're intent on listening in surround mode I wouldn't bother getting serious about your front end.
If, however, you are interested in getting more serious about 2-channel the 985 may be a serious problem, not because it is that bad of a preamp but because I think that the 985 digitizes all analog inputs(although you mention a passive mode, which may be an analog pass-through?). This pretty much would negate most or all of the benefits of going with a better CD player or DAC, so in this case you're better off using a transport and the Rotel's onboard DACs. The Rotel may actually be better than you think in this regard, and if it were me I'd try something like a Cambridge Audio D300 which is very cheap(around $200?) and works very well as a transport. (By the way, don't be so quick to blame the Rotel for mediocre stereo performance as the problem may lie with your CD player, amplifier, or even your cables, or a combination of all three--you didn't mention the other electronics in your system.) It is imperative you use at least a decent digital cable--I'd highly recommend the Apogee Wyde Eye, which you can probably pick up at Guitar Center for around $25 for 0.5m cable.
The reason I'd say don't quit on the Rotel is that I've been using the RSP-980 for years, and although it is by no means a high-end preamp it held its own very well against some serious stereo preamps I brought home for comparison, to the point where I've delayed upgrading my preamp. I'm using an EVS Millennium DAC(upgraded from a modified MSB Link DAC) and a Pioneer DVD as a transport that was a huge improvement over my mid-priced one box CD player, and the Rotel was very transparent to the various sources and let the sonic benefits come through clearly. If the 985 has an analog pass-through, a good CD player or DAC may be a very worthwhile investment. Best of luck.