First, I would suggest ripping your CD's to your computer's hard drive and using your computer as a transport -- I bet it would beat the sound of your current CD/DVD player. Next, the easiest upgrade is to rip your music to the hard drive uncompressed -- this will sound way better than MP3. For about $175, you can get something like an M-Audio Audiophile USB DAC, which will
allow you to bypass the soundcard in your computer, take the music out of
your computer in digital, feed it to your Arcam, which should have a much better DAC than either your DVD player or your computer. With the other $425, I would suggest a better sub-woofer because it sounds like movies are a high priority and if you want more oomph -- that's where I would look to get it. I would recommend looking for something used here on A'Gon -- you'll get more for your money.
