Hey, Lasher - haven't seen you around in a bit. I know your post isn't meant as a rant, but I wanted to toss out some of my own thoughts on the matter. Believe me, it's something I've thought about a time or two...
Depends on who you ask. At this point, I would say "no" - but I don't know that I'd say the same if you changed the question to, "Has Sherwood dropped the ball?"
They haven't. We have seen several original product designs that are built around distinctive innovations. The Bookshelf, the LCR, and the RR2150 all come quickly to mind. I think that the reason we've seen a change in the way they develop surround processors is because there has been an industry change in the last four years or so. Surround processors are much more complex, requiring much more development resources, and have possibly even fewer options for innovation.

Here's what I mean: the Model 950 had the latest processing options available at the time (Dolby EX, DTS-ES, Pro Logic II, and DTS NEO:6), component video switching (no transcoding), offered one of the first examples of multiple independently-adjustable bass management crossovers, and had a neat innovation in the way it handled the multichannel analog input (which was at that point included almost exclusively for DVD-Audio and SACD). Today, a surround processor is expected to have a full-blown video processor (transcoding analog sources to digital for HDMI output along with scaling, deinterlacing, and other processing capabilities) and the latest processing codecs (which means Dolby EX, DTS ES, Pro Logic II, and NEO:6 end up playing second fiddle to DSD, Pro Logic IIx, Dolby Digital Plus, Dolby TrueHD, DTS-HD, and now even Pro Logic IIz). That nifty multichannel analog input is hanging around just as a backup and will in most cases never be used because the sources that might be able to use such an input are now all equipped with HDMI - and most have analog sections that are not as good as the analog section in our processor, which reinforces the decision to take the easy way out and use HDMI. As a result, there's no point spending dollars on creating new innovations there or even retaining old ones. Bass management is supposed to have multiple independently-adjustable crossovers, but it is also supposed to be overshadowed by some form of room correction that automatically sets our crossovers, distances, channel trims, and applies all manner of EQ to every speaker in the room. Once you get all the expected features in place, you've built a device that is at least an order of magnitude more complex than the Model 950 - which makes it painfully difficult for anybody but the big boys to develop something new without taking a really long time to do, and all that development time just makes it harder for the final product to compete and be profitable enough to pay for the development time. It also leaves you with fewer opportunities to innovate. One of the appeals of the Model 997 - and likely a big reason that Outlaw pursued it, even if it isn't a home-grown design - is that it offers one of those rare opportunities in the form of Trinnov.

I had a debate recently with some folks about OPPO Digital, and the subject was whether OPPO should try developing a surround receiver. I was opposed to the idea, for the very same reasons that I see Outlaw being forced to get creative in how they bring similar products to market: it's a hugely complex animal now, and the resources necessary to get something to market in a timely manner are likely to be painfully costly. My personal hope is that we'll see a shift in a few years. If a couple of chip makers (maybe folks like Anchor Bay for video and TI or even Mediatek for audio) were to develop some powerful and affordable chipsets and some robust, well-supported core firmware that could be used as a practical foundation for receiver and processor development, we could have an opportunity for smaller manufacturers to more efficiently and rapidly develop (and subsequently support) new surround processor/receiver products. They could even look for ways to work in some creative innovations at that point. There's precedent for such things, if you look at the video card market about ten years ago when nVidia and ATI were duking it out and companies could use a GeForce reference board as a foundation for very rapid development of a video card. Until and unless something like that happens, though, I worry that affordable and innovative surround processors are going to stay hard to find (and hard to create) because of what they've evolved into. Maybe I'm being overly pessimistic, but I've felt this way for probably a couple of years now.