I would go all in wall. I helped a friend with a similar budget build a custom media room with in wall speakers. We ended up choosing the Dayton Micro Edge with a Pioneer Elite receiver and a Dayton 15: subwoofer. For the price, they are great in wall speakers and would fit your budget with. Not the best pictures.
Breakdown of the pieces chosen:
Center
Fronts
Rears
Receiver
Subwoofer
The speakers only cost around $250 (minus sub and receiver - $750 with them). I would personally invest in a better sub. You can also check out
Accy's for Less for a better deal on a Receiver. The speakers themselves sound really good for the price. You could have a very nice system for the money invested.