Calgarian, it doesn't look like you're getting any replies so I'll offer some comments, and hopefully others more knowledgable of the tradeoffs in trying to do an effective surround sound set-up will weigh in.
In my opinion, you've identified the critical issue: getting really good two channel sound, then going for the extra channels once that's accomplished. I think your instincts are correct to focus first on a good two channel amp. Rotel's own 2-channel amp is likely to have better sound quality than their multi-channel amp: just getting the power supplies right takes chassis space and significant parts. This is something Rotel usually does well, but I can't imagine they haven't had to make some compromises on this in the multi-channel amp. Many excellent alternatives exist for you to consider, as you've mentioned.
As to the preprocessor, there certainly are excellent sounding 2-channel linestages that will be superior, but it won't be *just* because they are 2-channel. Some linestages may not sound as good as your current preprocessor, so I recommend you apply some critical thinking and *listening* on this element of your system in a next phase.
There are several members on Audiogon who've assembled superb 2-channel systems to which they've added the surround sound processing capabilities for those ocassions when that option's desirable. Albertporter has posted a couple of times about how he's accomplished this in the world class 2-channel system he uses.
In my experience a preamp upgrade surpasses an amp upgrade. Search the archives on this question. Volumes have been written. My $.02 = Buy a mint-used $1,500-$2,500 tube preamp of your choice. Use the preamp 'main' RCA outputs from your Rotel processor into your tube preamp for HT. Run your CD player or other 2-channel material directly to your 2-channel preamp and your miles ahead of where you are now even with your existing Rotel amp.
Pre vs. amp depends, but some amps sound pretty similar. I've heard large differences in preamps (and amps too), but mid-fi amps can sound somewhat alike.
Why not invest in a Meridian 565 DD 5.1 processor unit? Many will swear that the sound in 2 channel is on a par with a very good pre and they can be obtained fairly cheaply, plus they do DD as well.
I have a 568 and use it for two channel -- it sounds considerably better than many processors I've been exposed to.
Tubes! Butler audio makes 2,3 and 5 ch. tube amps.
I'd go with a 3ch.to use with your center speaker also.
I think the key is to figure out what your budget delivers incrementally as the price pts and performance gaps of pre-pros vs amps (whether it be chging to another multi channel or adding a two channel amp for the mains only) are likely to be quite different. My guess is go for the pre-pro upgrade. Especially given...when in doubt start closer to the source. Your DVD players are really good so...One thing u may want to consider is look at both pre-pros and amps by Arcam....
Since your amp makes the sound of your preamp much louder, I'd suggest that's more important. But crap is crap, no matter which box it comes from.
Also, you can't retrieve what isn't there - so if the pre doesn't pass good things, the amp can't make them appear.
Here's one alternative. Sell your Rotel seperates. Buy a decent used AV reciever ($400). Only use the amps in the reciever for the middle and surround speakers. With the money you have from the seperates and the IC's and power chords, buy a good two channel amp and pre.
I certainlly agree with Maich with re. to the 565. The plain 565 does not do DTS;that requred the z3 upgrade. The sound quality on this piece is only limited by what amps and speakers you pair with it.--(Yup,had one.)
what's more important...Your heart or your brain.? Oxygen ,water or sunlight. ??
Thanks to everyone who replied. Based on what I've been reading, it appears that more people would find the preamp to make a larger sonic difference. I've been tossing the idea of moving toward a tube preamp (or possibly a multichannel tube or solid state preamp such as the Copland 306 or the McCormack MAP). If I were to go this route, I would have to change my DVD player to a unit that has 5 analogue outs for HT. I have absolutely NO experience with tube products and would like to pick your brains: First...is it safe to leave a tube preamp on for extended periods of time? How often do you need to change tubes (how long to tubes last)? How long does it take tubes to warm up?
I've done a preliminary search on this site with no luch. Any info would be helpful!
For your info ...I recently upgraded from a Rotel 1066 to an Audio Refinement Pre2 DSP(has analogue bypass function)in an attempt to improve 2 channel listening. I knew the Rotel wasn't great for 2 channel and found the Pre2 DSP much better as I had read it would be. I then purchased a used Proceed 'PRE' which has HT pass thru and found the sound difference for 2 channel to be much, much better again, exceeding all my expectations. I also have the Rotel 1075 and 1070 amps and I can tell you the 1070 is a much better amp for 2 channel listening, larger and better defined soundstage especially.
I've searched here for great pre/pro's that also do great 2 channel and the names I've found (all used) are:
These are older pre/pros which don't have component video switching (save the Anthems)and probably have just basic DD and DTS processing, you'll have to check to be sure. I am extremely pleased with my Pre2DSP and Proceed 'PRE' combo, I purchased both pieces used for $1200 Canadian total! The Pre 2 DSP is much more detailed than my Rotel for DD and DTS, but lacks good bass management, though this unit is upgradeable.
Hope this has been of some help. Good luck in your search.
IME, the preamp makes a bigger difference. It is much more complex circuit-wise than an amp and the signal levels are lower so it makes perfect sense.
I had a Rotel 1066 pro + the 1075 amp and sold them to get funds for better 2 ch. but it did a nice job on the muti ch. With your budget you can maybe pickup a McCormack DNA 1 amp with upgrades or a Threshold amp and a nice tube preamp and by your user name I take it your in Calgary and a Canadian Co. called Space Tech. Labs out of Vancouver has some very nice Preamps which are handmade and can be tailored to your system and upgraded later if need be. so you can get both as Space techs Preamps are the biggest bang for the buck. http://space-tech-lab.com