Have 1.2 K to improve it...what to do?

Damn, that's kind of a tough one.

While a bigger display is a great upgrade, the unmatched speakers up front kind of bug me. And I think the Polks mated to an Onkyo receiver would be a nice upgrade.

Does it have to be an LCD? I always thought they were a bit bright and washed out compared to other technologies.

What's your room like? Dedicated or not? How far away do you sit? Personally, I couldn't get by without a projector after owning one. If I had to start slowly from scratch, I would buy a projector, then headphones, then a receiver, then the rest..

I currently have a PJ with 76" screen in a room smaller than that, and also sit 9' from the screen. A completely different experience than a small CRT.

I'm not saying it wouldn't be a good idea to upgrade the audio. What I am saying is the 26" CRT seems to be by far the limiting factor in your system.

I don't find it too big at all. In fact, many of my friends love it and agree it's not too big either. IMO, it would be ideal if it were slightly larger; so 80" would actually be about accurate, or perhaps 85". The screen is 1.78:1 (16:9) aspect ratio.

My 76" screen is not my primary system and I want to minimize volume in that room, so I actually use headphones a majority of the time. Not ideal, though I could get away with a 7.1 system in there as well; I just haven't.

I'll have to wait until after work to measure the size of the room and get back to you.

By the way, the projector is a very inexpensive yet highly popular Infocus SP4805. You can get them for less than $500. I wouldn't spend over that unless you get 720p LCD, which is at about the max of your budget, unless you buy refurb/used. If you don't mind your audio and watch a decent amount of High Definition broadcasts, Xbox 360, PS3, or plan to get a Blu-Ray/HD-DVD player, I'd highly recommend a PJ like the Panasonic AE-700 (last generation but cheaper) or AE-900 (possibly a tad higher than your budget). You'll be absolutely blown away.

If you watch a lot of sports and are still stuck in Standard Definition-land, you definitely owe it to yourself to step into 80" HD. It's incredible; like skybox seats, only more comfortable.