gwalsh, that is a tough question.
I would say yes, but a qualified yes.
Personally I went from an H/K AVR230 (6 years of yeoman service) to the Denon. Although I had a Blu-Ray player with an onboard decoder, it was an earlier model, and I would say the sound quality was underwhelming through the 7.1 analog-ins on the H/K.
When I used my PS3 (fat) as the Blu-Ray player, it sent a core DTS or DD signal to the receiver via optical. The higher bitrate on the HD audio core was good, but still missing "something".
However, when I got the Denon and ran the audio via HDMI (decoded to DTS-MA or DTHD on board the PS3), I was surprised at how much better it sounded. A good test disc I use is the "regionals" performance in Season 1 of Glee (final episode), as it has lots of dynamics, tons of information through the centre, and good use of surrounds. I was pretty blown away by how good an "inferior" receiver sounded, and was very happy with the change. Chills down the spine sort of stuff.
Using the DTS core (via optical), I could hear compression through the centre at high volumes - this completely disappeared under the DTS-MA. Channels were also more distinct, and each had more "quality" information through it (I'll attribute this to better dynamics). Although this wasn't the jump from stereo VHS to DVD, it certainly was audible, especially if you like things loud (such as myself).
Where the qualification comes in is that although the Denon with lossless audio sounds notably better for Blu-Ray, it is not as good a 2.1-channel stereo receiver as the H/K was. Although I have worked with the Audyssey (and probably need to do more work with it), the sound lacks a certain "richness" that the H/K had. The Denon was much more forward in the mids out of the box compared to the H/K, and I just haven't quite hit its sweet spot for music.
As I'm fond of saying, YMMV. Seeing that you have Polks is interesting, as I've found Poks a bit forward, especially in the upper mid and top end. This makes them well suited (at least to my ears) to an H/K receiver. Possibly a 1600 would be a good move for you, though after comparing Audyssey and EZSet, Audyssey is something I think I will want on all future receivers.
As one last FYI, a buddy of mine who has room issues (and can't agree on treatments with the DW) went from an H/K AVR254 to an Onkyo TX-SR607, and was able to get it balanced to his room better than the H/K - he's pretty happy with it.