Audio from a DVD player-that far behind sonically?

I have been a dedicated 2 channel audiophile for well over 20 years....I have reached what I found to be as close to the pinnacle of sound quality in one of my systems.

I recently, after the purchase of a Sony LCD flat panel TV, got the urge to dab into home theater. I began with a Denon dvd2200, and then got the upgrade urge and began to integrate some of my back-up 2 channel gear into what was a simple DVD-LCD system.

I only run 2 channel from the DVD player...

I upgraded to a Denon dvd5900 DVD player.

I upgraded to a removable IEC for my Sony LCD
Line conditioned all the gear.
Upgraded all the power cords to Cardas and Tara Labs.
Ran all Tara Labs RSC Master Gen II speaker cables/ICs.

I then added a REL Storm III sub.
Upgraded the REL speaker cable.

I run the DVD into a JC Verdier AudioBloc Intregated tube amp. My speakers are Sota Time Domain Speakers (Mini-poor mans Wilson Watt)

After all this, I still cannot match the sound quality coming out of a Music/Concert DVD. I have had the same cables/amps/speakers in a different system, running REDBOOK, out of an Audiomeca Mephisto/Timbre TT1 DAC combo, and the differnces are huge, the DVD is flat, un-natural, very "digital" sounding.

as a last resort, I ran Digital out of the Denon Dvd5900, into the Timbre TT1 DAC, hoping I would get some of that old magic back, .....still there is a MAJOR difference.

Sorry for the long post, but my question really boils down to, a fairly good DVD Player like the Denon 5900, playing Music DVDs, that far behind in sound quality, than a Moderate Redbook transport/DAC combo??

would running an actual Home theater type DTS Processing receiver or amp improve the sound quality?
I think you may be on to something with your last statement. Perhaps the 2-ch downmix of the DVD is affecting the quality.

Have you tried to play the same CD using all the same gear, just switching between the Denon and the redbook setup? If they sound similar, then I think it points more to the DVD and or multi-channel downmix issues.
I have 3 versions of Hell Freezes Over. The cd is #1; The LD is #2 and dvd comes in third.--(I'm sure the vinyl would be even better) I could be wrong but I think the compression scheme for dvd,be the difference.
I think the compression issue is on the money....

it did dawn on me to throw in a random CD into my set-up, the sound was close or the same as how i recall it to be in my main system. I ran the CD out of the Denon DVD5900 thru the Timbre-TT1 Dac.

I am pretty shocked at home much better a standard Redbook CD sounds, over the audio portion of a DVD. Had I known that, I doubt I would have gone through all the steps to maximize my little HT set-up.
My understanding is that many times if you are not running full surround, the DVD player will revert the mix to a lower rez output or downmix. Some players do not do this - you'll have to find one that doesn't if you want full rez out of DVDs.
It's weird how good DVD concerts sound while you're watching the video. Recently I tried to listen to some of my favorite (and best recorded) DVD concerts with the video off. I was shocked how bright, flat, and just not good the sound was compared to CD's.

I'm using an excellent sounding DVD player IMO (Cary DVD-6).