It sounds like you have $700 for a receiver and subwoofer (as $500 + $200 = $700). Beyond a certain low point, what you get with more expensive receivers are features and more power, not much better sound. However, subwoofers get much better as you go up in price beyond your budget. So I would probably recommend spending a little less on the receiver and more on the subwoofer.
Here is a review of a decent Pioneer receiver that retails for $365; you should be able to get it for less:
http://www.audioholics.com/productreviews/avhardware/PioneerVSX-815ReceiverReview1.php
There are other models worth considering, but this should be a fine choice.
Now, at the risk of sounding like one of those salespeople who want you to spend more, for a really good subwoofer, you should consider:
http://www.svsubwoofers.com/subs_pb10_isd.htm
Here is a review:
http://www.hometheaterhifi.com/volume_11_4/svs-pb10-subwoofer-10-2004.html
This subwoofer sells for $429, but you need to add shipping, unless you live near the factory and unless they will let you pick it up (if my memory is right, they are in Ohio).
Unfortunately, this would put you just over your target budget, though a lesser subwoofer will make a noticeable difference. If you must stay under budget, then you will probably either have to go with a noticeably lesser receiver or subwoofer, or buy something used.
Edited to add:
Here you can get the receiver for $228 plus shipping ($26.21, according to Deal Time):
http://www.hookedontronics.com/show_product_details.jsp?cid=15715&c=0510DealTime&b=Pioneer_VSX-815S
I found this via:
http://www.dealtime.com
The total would be $254.21 for the receiver (I am trusting
www.dealtime.com for the shipping cost, so you will obviously need to double check this). With the subwoofer at $429 plus shipping, we have $683.21 plus subwoofer shipping, which, as I said previously, is going to put you just over your budget of $700. If you can afford this, I think it would be difficult (or impossible) to do any better at this price point.