Your computer can play the MP3 and DVD discs, and whatever music files are stored on a USB thumb drive.

To buy a fairly minimal nice-sounding system, with some decent speakers, an integrated amplifier, and a decent CD/DVD player would be roughly 3 times what your budget is.

I suggest that you get a pair of Audioengine A2 powered speakers, which will connect to your computer's sound output jack and give you some very good sound. I use them with my computer. They are $200.

For the subwoofer, I suggest the Polk Audio PSW505 subwoofer, which Amazon is currently selling for $200. It is pretty good value for the money, and will be quite adequate for that room.

Yes, it is not a true high-performance subwoofer, but those are all over $600, which is not in the budget.

Then add the subwoofer if you feel you need it. You might be shocked. http://www.audioadvisor.com/prodinfo.asp?number=AUENA5PL

khernik wrote:

How about adding a subwoofer to what I have now? Can I do that? Its pretty old stereo system.

You can add a subwoofer to any pair of speakers, as long as the subwoofer has speaker-level inputs as well as line-level inputs.

A few subwoofers have only line-level inputs, and you can't use that type.

The speaker-level inputs of a subwoofer connect to the terminals of the main speakers.

The Polk PSW505 or the JBL ES250 are both around $200; they would be good.
Don't bother with any subwoofer that does not have a 12-inch driver; they are a waste of money.