I did exactly what you are trying to do. I took a 1992 GT and put a 125mm rockshox on it. I love the way it handles now, the HA was way too steep stock for the riding I like to do. It does put alot more stress on the headtube but been riding it for the last 7 years like that and has held up well. But mine is a Ti frame so I wasn't too worried about that aspect.
But you have a bigger problem. It looks like yours might be a 1" steering tube. If that is the case you basically have no options for a new suspection fork. I think there might be one or two compainies making them but those are probalby going to be disc brake only. Which would mean you need new brakes, new wheel, new forks, new stem, new headset, and possibly shifters. I had to do the same thing and just replaced everything but the frame. If it wasn't an expensive Ti frame I was starting with I would have just bought a different bike. I spent the same amount of money.
Best bet would be to find a newer used bike for the money you were gonig to upgrade with. And I know you said you had some forks lying around you could try, can you post those forks up and we'll see if you can just bolt them on. Unless those forks you have are setup for cantilever brakes you are going to be spending some money to get it working.