Upgrade AVP or separate preamp/DAC for 2 channel?

Been there, done that. When it comes to 2 channel, nothing is better than a dedicated 2 channel preamp. Your main spks are very good floors stander that capable down to 34hz so no worry there. Not a lot of 2 channel music matetials that have bass in the 20hz region. I don't think you need sub unless you listen to pipe organ or a heavy bass lover.

In theory, if the stereo pre has a HT bypass (or even if it didn't) shouldn't the room correction still work for HT? Personally I wouldn't use the room correction for stereo listening, and with the 1028s I question needing the sub for that as well. So maybe this could still work if you're willing to let those things go for 2-channel?

As far as higher-end pre/pros I was thinking something at the level of the Bryston SP3 or above (actually I'd probably take an Anthem over the Denon as well). Would I put the Denon at that level? I can't say because I've never heard it (but I do have a Bryston stereo pre), but it seems highly unlikely to me. I'd want my pre/pro to at least come from a manufacturer with a reputation for creating really good stereo preamps if 2-channel is my priority. As far as I know Denon doesn't make any stereo preamps at all, so it's hard for me to believe the preamp section in the AVP stacks up to something from the likes of ARC or even Bryston. Oh, and then that questionable preamp section is housed in one box containing a whole bunch of digital processing and other power supplies (possibly not all that great and maybe even shared), etc. that could muck up the sound further if not isolated properly. Then again, maybe I'm just an audio snob.

If your priority is 2-channel it makes sense to me to put more of the money into a really good, dedicated stereo pre and let the Onkyo continue to handle the relatively less important surround duties, which it probaly handles just fine I'm guessing. Personally I'd sacrifice the room correction and sub for stereo listening if it means I could get something like the ARC in my pure 2-channel signal path. Then again, if you're willing to drop the coin on an expensive pre/pro that could work too, but make sure the analogue preamp section is well sorted out and matched to your overall system so you can reap the true benefits and potential for 2-channel. Just my $0.02 and hope this helps more than hurts.

I faced the same dilemma and decided to go with a Cary Cinema 11a based on Michael Fremmer's rave review of the quality of its sound, and his contention that a separate preamp was not needed. I knew in advance it has bugs, but after some experimentation, stereo (XLR) and 7.1 (RCA) analog from an Oppo BDP-95 now connect to the Cary in bypass mode. A DirecTV HD-DVR connects via HDMI. The Cary connects via XLR to Proceed HPA 3 and HPA 2 amps, and to a Velodyne SMS-1. The mains are KEF Reference 107/2s with Reference 102s for center and surround. The subs are a pair of Velodyne HGS-15s. This setup is bug free and provides superb sound for music, films, and TV. Everything except the Oppo was purchased used, so the overall cost was relatively low.

Have you had a Pro calibration of your onkyo? I believe K. Rubinson had very good results regarding sound quality after he did the Pro level calibration on his Integra (which I believe is functionally very similar to your onkyo). This avenue could save you a bunch of dollars and headaches.

Thanks again for the replies. Extremely helpful!

Soix, in particular thank you for your detailed reply. I was considering the Bryston SP3 (and the Cary Cinema 12), but no room correction ruled it out. I understand that both sound superb on 2 channel though.

Airkitty, I haven't done the Pro calibration for XT32 but I will look into that for sure.

Based on the responses, I think sticking with the Onkyo AVP for multichannel and adding a decent 2 channel preamp and DAC is the way to go.

In terms of which preamp / DAC, I am partial to the ARC equipment, but any other recommendations would be gratefully received!