Frank often has used AVA equipment for sale on his website. I would try to pick up a used amp and pre-amp from him. Unfortunately, I think the $500 dollar budjet is not realistic.
Agreed, as long as you only consider something that can be expanded and built up over time, no way is $500 going to be enough. The best bet would be to expand the budget to the $1500-$2000 range, in which case you can put together a system 95% as good as anything anyone has, using AVA parts. Everybody may disagree, but I would put a fair bit of my money into the electronics (preamp and amp) and not so much into speakers. Frank has some used equipment on his site at very good prices.
Decent speakers can be had for very reasonable prices on eBay - for instance, I have seen older B&W DM601s for under $300 a pair. Get that, and a cheap ($100ish) powered subwoofer (Polk, etc). Set it up correctly and it will be PLENTY good enough to fill in the low end. I would opt for small, high-quality speakers over bigger, lower-quality speakers. The cheapie Polk (and similar low-quality) subwoofer isn't very good, but if you chop it off at 50 hz or so it won't have all that much work to do. Just use any inexpensive CD player (even a $30 portable) - a costly CD player will not be significantly better, certainly not enough to break the budget.
If you do this plan you won't be limited if you want to expand in the future, but with this as a starting point you will quickly start reaching the point of diminishing returns. You will be able to keep the same preamp and amp forever since there isn't anything significantly better no matter how much money you spend.
If you are really limited to $500, then, and this will sound crazy in this context, but you might consider the Tivoli Model 2 radio (stereo version of the model 1). I have been exceedingly impressed with this little guy. It has its limitations on the frequency response but it's very musical and easy to listen to. And it's very inexpensive for the quality of sound, FAR better than boomboxes and FAR better for the money than the Bose WAVE (which, to my ear, is downright irritating to listen to). Add a portable CD player connected to the mini-plug input and you are set. Amazingly enough, the stereo imaging is quite remarkably good, too. Then save up for a better, expandable, system.
If you have to spend the entire $500, or just want a semi-expandable system, cheap speakers from eBay (same as option one), and the little $125 8-watt tube amp hit sold by Tube Depot and others, will work fine. Add a portable CD player and/or an iPod and you are all set. It's potentially better than the Tivoli radio but not that much.
I have had all of these type systems at one time or another, and was happy with the cost/quality ratio. Certainly a lot of people spend a lot more on things that sound A LOT worse. I occasionally build various kits (vellemann, Bottlehead (SET, ay carumba)) for people and get to listen to a lot of various HiFi systems with all sorts of weird and aggregiously expensive "salon" speakers-of-the-week. and the little Tivoli radio is sometimes a lot more listenable
Brett