To stick my 2 bobs worth in here........
Its interesting to note the OP's original wording of the question....
"DVD sounds FAR BETTER than audio CD"...........
Not wishing to put words into the OP's mouth, perhaps it might be more accurate to use the word DIFFERENT instead of BETTER.
IanW is probably quite correct in his guess that the audio signal on a DVD has been tweaked far more than on an audio CD. The whole point of an audio CD is to give a fairly accurate representation of the singers performance (for example). And as such will not have been tweaked or meddled with too much. Although in today's world, to find any modern audio CD that hasn't been altered by a studio engineer to give the ORIGINAL studio recording a lift by using either compression or any number of methods to enhance the recording is almost impossible except on a few serious classical recordings.
DVD audio on the other hand gets modified and changed by a huge degree before it gets to the home market. If you have ever heard a raw recording before an engineer gets his hands on it, it can sound a little flat and dull.
Much of it is done to compensate for the relatively poor audio equipment in most peoples houses. To help generally poor bass and treble reproduction, these frequencies are boosted to give the impression that the sound you hear is nearer to the original than would otherwise be possible. If we all had genuine studio quality equipment in our homes with large long rooms, then this wouldn't need to be done.
Even auntie BBC gets in the act. As far as I am aware the only radio station in the UK that doesn't compress its signal before transmission is Radio 3. And even they sometimes do it a little bit.
All the other stations - especially the commercial "pop" stations like Capital, Heart and Absolute compress their signals SO much that if you could compare the original uncompressed sound with that what you eventually hear in either your car or home, you would be staggered.
Remember, when you hear a modern music track on the radio in the UK, what you are hearing has probably had up to three completely separate stages of compression performed on it.
First at the time of the original recording, second at the time of laying down the final mix before burning the CD master and lastly before transmission by the radio station. No surprise then that most singers cant ever quite capture the same sound at a live gig.
Which is why the adverts on the TV commercial breaks sound so loud compared to the perceived audio level on the program that they interrupt. Its not because they ARE louder in MEASURABLE level, the audio has received a HUGE amount of compression which makes it sound louder to our ears. If you were to measure the advertisement sound levels using a dB meter they would appear to be at roughly the same level as the program. Which is why the advertisers state that their adverts AREN'T louder. But to our ears they SOUND louder. And its all down to signal compression.
What compression does basically is to make the louder sections of the music softer and at the same time boost the quieter passages. So it tends to even out the the audio spectrum with regard to sound pressure levels. So you can then lift the WHOLE audio track up before it clips to a higher perceived level or volume. Its a clever - but annoying - technique that has been used for many years in recording and broadcasting. If you want to hear music that hasnt been compressed dig out an old LP from the 1960's and give it a spin. Thats almost about the only way you will get to hear it. Or go somewhere to hear a singer and orchestra that hasn't been amplified - opera for example.
Go to a normal live concert with speakers and amplification and what you hear will have been compressed before it reaches your ears.
A better, fuller understanding of this subject can be found here..............
http://en.wikipedia.org/wiki/Dynamic_range_compression
Specifically related to dynamic compression used in advertising...........
http://www.statemaster.com/encyclopedia/Amplitude-compression
Sorry for all the waffle..........