I have a 7.1 system in my basement in an oddly shaped room so I know what you are dealing with though my budget was higher at around $8000 for hardware and speakers.

You are going to need good room correction for great sound. I would make sure any receiver you get has the best possible version of Audyssey available at your price point. Given your budget and the size of your space. I would look at the Denon AVR-4520 CL or the Marantz SR7008. Available from Crutchfield for $1599. Both will default to 5.1 but will allow you to switch to an expanded version of Dolby TrueHD, Digital, etc... that will be 7.1. The Denon is neutral while the Marantz is probably a touch warm.

Both Cambridge and NAD make very nice receivers, but they stubbornly seem to refuse to add the latest version of Audyssey to their systems. In a touch space, that is a massive drawback.

For speakers, NHT has a Home Theatre bundle called the Classic Three 5.1 surround system for $2399. This comes with a fantastic subwoofer, their B12d and there speakers sound good. You simply need to get a second set of surrounds for $440. That would put you at $4440 with $560 left over for mounting hardware and cables.

Also, to set up 7.1, go our to the THX web site. You will have 3 speakers in front, 2 on the side and 2 in back spaced at roughly the same distance as your front speakers. That is the only proper way to set this up for the DSPs on current receivers. You can add two additional front speakers if you would like as both the Denon and the Marantz support 9.2 channels and the additional 2 can be placed in the front.

There are definitely other speakers that would be priced correctly and deliver fine sound. I would be cautious with other receivers. IMO, Onkyo, Pioneer, Sony and Yamaha produce an inferior sounding product relative to Denon and Marantz. Incidentally, Denon and Marantz are owned by the same company, D&M holdings. Guess what the D&M stand for. Full disclosure, my theatre is powered by a Marantz Pre-pro and power amp and my family room is powered with a Denon receiver.

Good luck and I hope this helps

If your TV was where your sofa is, 7.1 would work just fine. The rear speakers need to be several feet behind your primary listening location. As you have it laid out, 7.1 won't work.

That Denon receiver is pretty nice and it has Audyssey MultiEq XT vs. the units I mentioned above which have XT32 the latest, greatest. Mind you, the slightly lower end units from both companies still use the XT version. If I had unlimited funds, no question I would get the new units. If you aren't paying for or are paying relatively little for that AVR-4308, I would happily take it and get better speakers.

I would look seriously at this Monitor Audio 5.1 package at Audio Advisor for $4750. These are easy speakers to drive and you will get plenty of high quality volume and a freakin' amazing speaker. These would be aimed at your listening space.

http://www.audioadvisor.com/prodinfo.asp?number=MRKSS6

I might also look at this PSB Imagine T package. Another amazing 5.1 setup but at $4995.

http://www.audioadvisor.com/prodinfo.asp?number=PBKT

As you set up Audyssey, you tell it the size of your front speakers and then move a microphone around the room to each listening location and Audyssey will then adjust each channel to optimize sound for each listener in the room. It will typically sound best at location 1, but will do it's best to optimize for all locations based on the acoustics of the room. Each time you set the microphone in a listening location, Audyssey plays a series of really annoying test tones from each speaker to do the calculations for optimal sound. It makes a monstrous difference for multi-channel audio.

Your brother's receiver and either Monitor Audio or PSB speaker packages above vs a new receiver and that NHT surround package. I would give my brother a very nice Holiday present to thank him for the wonderful receiver, but that's me.