Suggestions on replacement AV processor...

Since you seem to be a Cary kind of guy, how about the new
P-7 Surround Sound Processor/Preamplifier 7.1 Specifications
The P-7 design is a fully 24 bit/96 kHz circuit with the Motorola 5636 DSP chip. It uses discrete analog to digital and digital to analog converters (ADC/DAC).
Decoding ability:
Dolby Surround, Dolby Pro Logic, Dolby Digital, DTS
Inputs:
8 for audio or video/assignable
Surround Sound Modes:
7.1, 6.1, 5.1 for Dolby Digital/DTS (if applicable)
Outputs for speakers:
3F, 2S, 2R, SW
Mono/Stereo switching, multiple music modes for stereo surround simulation.
RS-232 port on back panel for future upgrades.
Balanced Outputs for main stereo speakers.
Bass and Treble controls, with bass management circuit.
Video Signal Resolution:
540 TV Lines
Signal Format System:
PAL (625/50, 525/60)/
NTSC (525/60, 625/50)
S-Video Output:
Luminance Signal: 1Vp-p (75 ohm load)
Color Signal: 0286Vp-p (75 ohm load)
Component Video Output:
Y Output Level: 1V p-p (75 ohm load)
Cb Output Level: 0.7V p-p (75 ohm load)
Cr Output Level: 0.7V p-p (75 ohm load)
Frequency Range: 2 Hz - 44 kHz
Amplitude Linearity: +/- 0.2 dB (20 Hz - 20 kHz)
Phase Linearity: 3 degrees (20Hz - 20 kHz)
Dynamic Range: 110dB (1 kHz)
Signal-to-Noise Ratio: 110dB (1 kHz)
Channel Separation: >100 (1 kHz)
Total Harmonic Distortion: 0.0008% (1 kHz)
Audio Output Level: 1.0 Vrms
Power Input: 120/240 VAC, 50-60 Hz
Power Consumption: 25 Watts
Retail Price: $3,500
Balanced analog audio outputs: $500

I personally don't think a "Cary" kind of guy would be happy with "bugdet" processor.People whom only have such, are missing a lot.Dvds aren't only about sound effects from 9 different directions. There in much good music in most movies. Somewhere down the road a quality pre, and, a quality processor will be required for optimum enjoyment. You have to make your decision; which is the more important to you? As I see it you need a 2/3k pre and a 4k processor.--2 choices. A processor such as MC1,and hold off for the great 2ch pre --Or, something like the Cit. 7.0 (4/5 hundred used) and that great 2ch pre. The MC1 will devaluate faster than the 7.0( The 7.0 as a temp. band-aid) It was a 3500 piece new;just no DD/DTS. You won't be giving up all that much/ you just hook the "fronts-out"(analog output) into an unused input on your good 2ch pre,--for movies.--(for your 2ch,switch back)

Get a good A/V preamp and a separate audio preamp. I have the Lexicon MC-1 and love it but it really needs a good preamp after it to make 2-channel shine. Check out a used BAT VK-5i or the like. These two in combination are very nice.

I recently purchased a Krell HTS. The Krell is fantastic for movies but not very good with 2 channel. This isn't an issue for me as I run the digital output of the Krell to my external DAC.

In terms of having to have seperate HT and audio systems, I strongly disagree. The problem I always had with the two was sticking a TV between my two speakers. I avoided this problem by purchasing a DLP projector with a retractable screen. My audio is set up optimally for music and the HT is an "add-on" that doesn't get in the way. I am blown away by what a great video system can do when matched to the same caliber as a high-end audio system.

It is possible but it will cost much more thn 4000 dollars. Your equipment is not cheap, so even after you do choose a preamp/processor your just gettting started. By the way I chose the Theta Casa as well. Digital technology is changing at a remarkable pace but a smooth tube sound will always be a constant in your system just based on your Cary components. Do your homework on each of the companies and read everything you can especially there philosophy on the incorporation of new digital technology into there existing models. I already agree with your system design; tubes in the front and tubes at the end of the audio chain. While not cheap definitely sweet.