Improve my system

Bass traps because "small" listening rooms are dominated by bass peaks and nulls below the room's transition zone or Schroeder frequency which about 300-500Hz (which is only a difference of about 9-10 semitones).

Room size (and budget) may dictate what kind of bass traps to get. Resistive traps (GIK, RealTraps) need to be pulled into the room at least 6-7" which equates to one-quarter the wavelength of 500Hz to be effective. Otherwise Membrane traps (RPG) can be positioned right against the wall where sound pressure is maximized. The Resistive traps work best when sound movement is maximized (which is at the one-quarter wavelenght) whereas Resistive traps work best when sound pressure is maximized right against the wall.

If it were me, I would do the following:

Room Treatments $500: I would get bass traps for the corners and panels to cover the 1st reflection points. This would improve your bass and soundstage tremendously.

Gik Acoustics makes some affordable panels.

Power Conditioner $600: This can make a big difference as well. A good power conditioner can improve clarity, soundstage, bass response, and bass clarity. One unit can handle 4 pieces of equipment (i.e. the amp, receiver, CD player, etc).

You can find these at: http://www.piaudiogroup.com/prod_filtration.aspx

Bluray/CD Player $600: Get an Oppo 83 Bluray player as others suggested. This will give you great bluray, and very good CD output.

This would leave ~$300 for power cords or dedicated lines.

I think this combination would help your system on several fronts.

How about using $600 of it for a HTPC(Home theater personal computer)? You can have a Blu ray drive included for this price. Along with a wireless keyboard and mouse.

Not sure how big you're into movies.But this will allow you almost endless use. Storing, categorizing of your movies and TV shows on hard drive. Meta data info is available free,which will give you movie and actor info at the touch of a button. Plus no more fussing with DVDs or Blu rays.

You have several online TV providers. Most of them are free,such as Hulu TV. You can watch TV shows or movies when you want. If you have a high speed internet connection the HTPC will make paying for cable TV, satellite or a DVR unnecessary.

Add a dual HD tuner to the HTPC so you can watch and record your Hi-Def channels OTA or through cable. Buy yourself a couple of large hard drives for storage and you're off to a whole other world of Home-theater entertainment.

All for less than $1000.

You should replace the bluray player, try getting an oppo blu ray player. The ps3 is intended only for gaming.

I think I too would change out the use of the PS3. Though I know you can get some good use out of them. I also would second the idea of a turntable if you have and like to play vinyl.

I think Queefee makes some good points. I think your most noticeable overall improvement per dollar spent would come from implementing Audyssey into your system in some way if you haven't already (I'm not familiar with your processor). After that I'd try to match the front speakers, and then maybe a second sub. By the way, this is from a home theater perspective. If this was also geared toward improving 2-channel that's a whole different discussion. Best of luck.

Well of course there's not enough info here to make a complete assessment of your system, lifestyle, etc, and what you do and do not like about your system.
Still, the first thing I'd recommend is that you do matching speakers all around. I'd add matching fronts to your center and rears - even if that means leaving your current mains for 2 channel only dubties. You MUST do matching all up front. It's the same as having a mis-matched left and right speaker for stereo! Basically, you wouldn't do it. You'll never have a coherent, quality sounding multi-channel systm that dissapears into the sound stage. Quality over quantiy...every time.
I know people day dream about building a theater system around their beloved stereo speakers they love so much. But, the reality is is that it's all about "the team" when doing a system. And you can't mix and match on the speakers, and expect great sound. No need to reinvent the the wheel here. Ask any pro, they'll set you straight here - trust me.
Beyond that, you can also upgrade sound quality to latest HD codecs, EQ technology (Audyssey?), etc, with a new pre-pro. Dynamics also improve here with this upgrade.
I would also make sure you'd doing Blue-Ray, have your speakers all setup where they sound the best in your system, relative to your seating, acoustics in order, all levels set properly.
Another often overlooked parmeter, that affects dynamic range, is making sure you're doing proper bass management considerations. Simply running even large speakers full range - simply because they can be run full range - is a mistake! Cross the speakers up higher from a subwoofer is a much stronger dynamic pressentation, considering all speakers setup properly in the room (avoiding nasty holes and such in the response curve, near the crossover points, to be sure).
Beyond that, can't speculate on your sources, wiring, room layout, acoustics, lifestyle habbits, relative current equip setup choices, etc. Pehaps an update?

Your setup seems satisfactory for home theater listening. What about dedicated 2 channel? You could purchase an integrated and a new set of speakers. It also would depend on what your musical preferences are.

The PS3 is a weak link. Look into a nice multi player for 5 channel SACD/DVD-A and quality 2 channel. Perhaps a modded Denon from Underwood?

Room treatments. While these can be madding to select, it offers the best bang for the buck. Check out Toole's 'Sound Reproduction' book before you make any changes.

I keep hearing about line cleaners but I can't get myself to spend the money on those. Do they really help that much? I don't seem to have any ground loop hum, should I still go that route? I have no interest in a turntable, I already have one and haven't turned it on for over 20 years...

I would say make sure you have quality AC lines/and recepticles ( plugs ) coming in..Most will start from the electrical panel in, and provide at least 3 Dedicated ac lines..This would be where I would start ( if you haven't already ) and what ever money you have left, spend on something else..If you don't have quality AC coming in, all the after thoughts could be wasted....Hope that makes sense.

Have you considered a turn table?