>>2. Can I get good sound quality (better than $200 CD player) for $1000 or less?<<
If your question is -- can you get sound quality better than a $200 CD player by adding $1,000 worth of gear to your computer, the answer is better than that. Hard drive filled with uncompressed music played through a $1,000 USB DAC will give you sound that can compete with CD players that cost thousands of dollars.
You have to decide how much convenience you want and which trade-offs you're willing to make.
I have a reference system in my listening room, but I also want a system for casual, convenient, family-wife-and-guest-friendly playback and listening. I am spoiled and I still want to have sound that I can enjoy, so I use a high quality USB DAC and load my music to the hard drive uncompressed. The convenience of having hundreds of CD's worth of high quality music available at the click of a mouse, watching wife, kids, and visitors choosing music from a list of titles through which they can scroll with no need to rifle through my CD cases, no piles of my CD's laying about when they are finished, etc -- is really gratifying.
Depending on what kind of TV Monitor you have, you could connect your computer to your screen and you could rig a wireless mouse so you could scroll through CD's and titles on your TV screen, make playlists, and select songs with a wireless mouse.
If you pass this system through your pre-amp, you can use the pre-amp's remote to control the volume or you could control the volume with your wireless mouse if you rig it that way.
I dedicate a Mac G4 1.25 Ghz Laptop to my system. If you use your video display for your screen and rig a wireless mouse, you could probably dedicate a computer to your system and it wouldn't have to cost an arm and a leg. You can also install a DVD drive in your computer and play DVD's, but I am not sure how it would compete with a DVD player.
You *can* use a computer for a music server and send the signal from your computer to your system through wi-fi, but I suspect the gear available for that type of solution will not offer high end sound so I have avoided that route. I also tried lower quality USB DAC's and they all sounded terrible to my ears. What you use will depend on your goals for your system, your budget, and how much sound quality you're willing to sacrifice for convenience.
There is a Home Theater Computer forum over at WWW.avscience.com dedicated to this type of stuff, but it seems to me like they tend to emphasize the video side and are less picky about sound. I don't see a lot of discussion about high quality USB DAC's over there. You can get a computer to store and play your CD's and DVD's, act as a TIVO, and operate high powered video games, but this all depends on how tech-literate you are. The forum over at avscience is an excellent reference for the video and home theater aspect of building a HTC.