You must upgrade all of it. It is scientifically proven to be impossible to just upgrade parts of your A/V system.
Speakers make the biggest difference overall, and there's nothing wrong at all with an H/K AVR.
I'd do the speakers now, prepro/amp later.
If you could stretch your budget by $500, you could also pick up an Emotiva LPA-1 amp and use your H/K as a prepro (if it has pre-outs). That might give you more oomph to your system.
Another tip, play with the placement and calibration of your system. Someone here gave me that advice a while back and it's absolutely true. Make sure you're using an SPL meter to get those Polk's calibrated correctly. It can make a world of difference and won't cost a dime (well, except for the $30 SPL meter, if you don't have one already).
