I've a couple good options for you. Very similar to what Matt34 suggested.
Option #1:
Get a full 5.1 speaker set of the excellent, new,
2nd Generation Andrew Jones designed Pioneer speakers
That'll come to $400 for the SP-C22 center, SW-8MK2 subwoofer and 2 pairs of SP-BS22 bookshelf speakers for Front L/R and Surrounds.
Add the least expensive 5.1 A/V Receiver, which is
Onkyo's HT-RC330 from A4L for another $100.
So you've gone $100 over budget with this system. But you'd be getting what are by all accounts the best low cost speakers out there at the moment in the Andrew Jones 2nd Gen. Pioneer speakers.
Option #2:
If you've gotta stay under $400, you can get what is, by far, my favorite very low cost speaker package: the
Onkyo SKS-HT540 for $250 . The speakers likely aren't as good as the Andrew Jones Pioneer speakers, but they're still really good for their insanely low price. And the subwoofer in the Onkyo package is a real champ! I always smile when I hear that little $90 sub pumping out bass that it has no business being able to do for such a low price
That'll leave you $150 for a receiver. You'll notice that the SKS-HT540 speaker package actually includes 7 speakers, but you do NOT have to use all 7. 5 speakers, properly set up according to
THX speaker placement guidelines will actually sound BETTER in a room the size of yours than stuffing all 7 speakers in there and ending up with the surround back speakers way too close to your head and being distracting and sounding bad because of it. Don't use the 6th & 7th surround back speakers unless you have AT LEAST a good 8 feet of space from the back of your seat to the back wall. 5 speakers will actually sound better if you have less space than that, which you probably do.
Anywho, you'll be forced to stick with 5.1 anyway with only $150 to spend on a receiver. Go a wee bit over budget and you can get the
Onkyo HT-R590 as your least expensive 7.1 receiver option
