I'm sorry you had a bad experience with that unit. That sort of thing is very frustrating.
I politely suggest that your experience with this one car and one unit are not sufficient data to draw too many global conclusions. We install DICE units and others every day, and we do not find the DICE units to sound bad inherently. We often integrate them with systems that have a factory HU, Dynaudio and DLS speakers, and Zapco and DLS amplification.
You should have heard a significant difference when you upgraded to Apple Lossless. If you didn't, I believe that you had a HW problem - regardless of the relative performance merits of the DICE.
Remember, the CD changer sends audio down a cable the length of the car too... down what I believe to be a balanced line.
The DICE HW module has an audio buffer IC positioned near the iPod cable connection of the internal iPod interface PCB - the Rohm BD3805F. I have no experience with this part, but the deleterious effects of cable length should be minimized by this device (data sheet available here:
http://www.tranzistoare.ro/datasheets/70/489212_DS.pdf
It is possible that you had a unit with a bad MUX IC. The DICE uses two MUX ICs, one to switch between the iPod and the AUX audio in, and the other - well, I don't know what the other one is used for, it's on the OEM interface board, not the iPod interface board.
It's also possible that you had a bad or miswired cable.
Since we seem to be slapping our audiophile credentials on the table, let me mention that I use an Audio Research LS7 tube line drive preamp, a modified Counterpoint amp, Theta DAC, Thiel, and Grado headphones.
Doesn't affect the truth or falsity of my statements, but might get me in the club
Have you tried a second unit and second cable, in a test situation?