1 would moving up to a receiver in the $400 range give a great improvement compared to the Onkyo 304 (power and sound quality)?
2 Would a new receiver in that price range be a good first step from where I am now?
Any suggestions would be appriciated. Use is 90%+ movies/ Optoma HD70 projector.
Yes I believe it woud, but not a huge audible difference, it would add more capablility. The $400 range would give you around a 25 to 35 watt increase per channel, and will likely add two channels more than you already have.
With your budget, I would probably look at the Onkyo 605. If you're not in any need for upscaling in the receiver I would go with the Onkyo 605, it can be had for around $429, it's a really nice unit. If, however, you find you are in need of upscaling in your receiver I would recommend the Denon 2308, it can be had for around $598. I suggest you conclude what's is and is not important to you, some people really value pre-outs, if your one of them then the Onkyo 705 is going to be a good choice, but with it you have to give up the upscaling (however, I think it scales or converts 480i to 480p). Not trying to confuse you, just trying to give you a choice. If I had to make the best choice for you blindly, not knowing what your needs are, I would most certainly go with the Onkyo 605, it's definitely more bang for the buck.
Getting new speakers first, as was suggested by others, probably is not a bad idea. Once again your needs would come into play.