New HT system
I agree that a good yamaha receiver and 5.1 speaker system will provide superior performance in your price range. I think it is important that you upgrade your front and center channel so that they will tonally match.
Here are some suggestions:
Refurbished Yamaha RX-V2500 or 1500 from ubid ($4-500)
Axiom Audio M22's, VP150, and QS8's or similar speaker system from Paradigm, PSB, etc. (<$1500)
12" sub from SVS or HSU ($500)