music server virgin needs answers

OK ... So I see in the new issue of Absolute Sound where some new USB music server gets a VERY high reccomendation. It's only $75 so I think this may be a fun thing to play around with ... but then I stop and think this: My son's Ipod has a LOT of great music on it, but I'm sure it's just stuff downloaded from either redbook CDs or off the internet.
So, since his original sources were not top notch audiophile sources, won't the quality of sound be limited to the atandard of the original source ? Anotherway of putting my question is this ... Would great sound only be obtained if the original downloaded source was of some form of super lossless quality stuff off some specialty website ? Thanks for setting me straight.