ok, for a $500 budget, I would recommend the following setup.
A receiver, 2 front mains and a center speaker. You can add surrounds later, but to be honest, the surrounds aren't as crucial and with a lower budget, you'd have to cut something.
From personal experience, I feel like I wasted money on my surrounds.
If you get a receiver for about $200-300, it should have HDMI switching and video up-conversion. What that means is, you can plug all of your video sources into the receiver and have one HDMI cable going out to your TV. This will work for video sources that aren't HDMI, for example Component video and even RCA because the receiver will "upcovert" it to the HDMI cable. (it won't look better, it just moves the signal over)
Onkyo has a few models for around that price. TXR606, TXR506 i believe. I own a TXR605. I think some of the cheaper harmon kardons do the job well, but I've never had any experience with them. (
http://www.onkyo.ca/model.cfm?m=TX-S...s=Receiver&p=i)
For speakers, have a look around. My preference are for Paradigms (
http://www.paradigm.com/en/paradigm/...1-2-2.paradigm), they're a canadian company that makes awesome speakers for their price. But they may be a little out of your range. I think for the cheapest fronts and center it's $400ish. So if you get a $200-300 receiver, you'd be 100-200 over.
Oh and don't get fooled by the expensive cables, just get the cheap ones. They do the job. Speaker wire from Home Depot I found to be cheap and rugged. $20 HDMI cables do the trick, and if you're really cheap, get the mono-price ones online.