The isolation pad may not be improving the digital data from the CD itself, but all of the other components (power supply, etc) between the laser and the audio output.

Yep, I agree. No matter how good the bits are going to the DAC, the Digital to Analog Converter produces Analog. Every DAC i've ever seen has seperate power and ground for the analog and digital sides. Good DACs (like in CD players) provide massively excellent isolation between these two sides. However that does not prevent the circuit designer from allowing some noise to seep into the analog portion from the outside. Now, any good analog chip (DAC, OpAmp, etc.) also provide amazing noise rejection from the power supplies. None the less, I believe he said the sound staging improves, not that he could hear lots of noise in the audio. I submit that it could be that a TINY amount of noise is getting into the analog side of things and thereby clouding the subtle high frequencies that the ear uses to locate a sound. I bet that the noise is comming from whatever the CD player sits on (without the pad) and enters through the feet of the CD player. The pad is probably just providing electrical isolation.

It's just a guess, but could be easily tested by placing a piece of foil under the pad and wrapping it around to the top side and then setting the player on top. I doubt the the foil would greatly affect the mechanical properties of the pad, while providing a nice electrical path similar to the CD player without the pad. You could just use a single wire, but that's not quite the same.

Steve