Have you considered going used? I think you could get a nice plug in dac like the HRT Music Streamer II High Resolution USB D/A Converter for $150 at Amazon or other places. Then you could get a used integrated for $300 or less. That would leave you $300 to $400 for some cool little speakers. There you have SO many choices! Check through the stereophile archives, Robert Reina and Sam Tellig and Stephen Meijas all review budget gear.

But please keep us informed and let us know what you decide. If you are lucky, Jackfish will give you some suggestions. I consider him the suggestion king!

Trey

Audio gd Sparrow Basic DAC for $170 from Pacific Valve.
http://www.head-fi.org/forum/thread/483188/official-audio-gd-sparrow-thread/480
http://www.head-fi.org/products/audio-gd-sparrow-dac/reviews

Yamaha A-S500 Integrated Amplifier for $400.
http://www.whathifi.com/Review/Yamaha-A-S500/

PSB Image B25s in closeout for $320/pair at DMC Electronics.
http://www.stereophile.com/standloudspeakers/1204psb

Craigslist is your friend, seriously. My whole garage system is from Craigslist: a Denon SACD/DVD-A/CD player ($200), Sony home theater receiver (100 WPC - $100), and Polk Audio speakers ($150), well within your budget. My DAC is a new Cambridge Audio ($400), but you should be able to find some cheaper used ones now that they have been around awhile.

At one point I had an Archos media player that had an optical output and the home theater receiver's built-in DAC handled the decoding with no problems (which means I didn't need an external DAC at all). The Archos would skip and pop on 320kps MP3 files, though, and that drove me crazy.

There are good deals on Craigslist if you know what you want and you are patient.