Buyer is claiming damage that was done by him!

I've dealt with this stuff before, and know a lot of eBay sellers that have also. And you made the right decision IMO. This was the smart play. And your good nature served you well. Had the seller chosen to go to PayPal for a refund. They would have tried to get both of you to pay return shipping, and see who blinked first. And then after a short period of like a month or so they would have refunded the buyer the entire amount.

Now if you both chose to be stubborn. He would have gotten to keep the speakers, and the refund. But I'm assuming you would have paid the return shipping. So you would have most likely paid the shipping both ways, had to buy the new grills anyway, and got stuck dealing with having to sell the damaged speakers again. This would have surely cost you more then the $200. A lot more!

Yes you got screwed out of $200, but it could have been worse. I would chalk it up to a $200 lesson that might save me money in the future. Unfortunately this is the reality of selling online, at least when using PayPal. And now you know why you see some sellers on forums that refuse to take PayPal. Unfortunately you have no choice on certain platforms, like eBay. But that's a whole other story there. 

Cheers
Andy B. 

@mofimadness
I want to wait until this is all wrapped up. I don’t know what else he might decide to pull!
Thanks much!

Sound decision Yogi!

Right now with an agreement on the table I would keep quiet, make sure they agree all is well and leave positive feedback.
Make sure when you refund the $200 it is from the same PayPal payment they sent for the speakers.
That way if they try to make any more noise down the road PayPal will see that you ALREADY dealt with them and they agreed to a partial refund and that will be the end of that!

Do NOT ask me how I know this...…...

WOW- This must be the week of seller side issues. I have been both buyer and seller here and on other sites. But this is a first for me.  Last week I sold a fully factory upgraded Dahlquist LP-1 active crossover. Despite this unit having functioned perfectly in my different systems at home and its intact arrival to buyer, he demanded a send back within days and a full refund after discovering it brought a "noise" to his system.  I offered suggestions on possible remedies and even had the Dahlquist techs offer their guidance to identify any possible system caused conflicts. No matter- I now have had a PayPal dispute started that, despite having all my proof documents, photos, receipts, will likely end up placing me on the losing end as a seller. I guess maybe I have been naive, lucky, or it was just my turn. Yes- I am very realistic- I understand the many pitfalls dealing with high end audio components exchanged and put thru the rigors of our US shipping options but this unit was not just "used gear" -especially considering the $370 referenced service center upgrade/check up by the Dahlquist experts last September.  It was not  only fully functional and in excellent shape but brought up into modern times by experts.  And mind you-the service was my choice-there were no problems with the unit before or after the factory upgrade. 
 During the initial phases of this buyer dispute I was eager to help and actually reached out to the shop back east that did the work. They spent the time going over potential causes of noise with me over email. I was given little specifics as to the "noise"  from buyer but the service center not only offered potential answers but they even gladly offered to help the buyer directly to better integrate the unit with his system or identify what is going on with the noise. I even offered a contribution in good faith to make everyone happy. Sadly today PayPal dispute has ruled for send back and refund.
SO HELP ME (and likely, many others) OUT here....What exactly are the "rules of the road" as a seller? Going forward something sold like this-and in this condition can be demanded to be returned indefinitely?  I am not being sarcastic-- I  genuinely want to know the usual protocols and seller's expectations after an item has been well packed-insured-shipped-and arrived as it left.  I don't get it!  Like someone said...is it worth this kind of trouble selling online?

This is why I hate using paypal.  Audiogon makes every transaction run through paypal now.  Even if it is for a local pickup.  Paypal doesnt protect sellers at all.  As a buyer, you can go around demoing peoples gear for cost of shipping if you wanted to take advantage of paypals buyer protection.  Ive had this exact same thing happen to me a number of times.  You kinda have to just do what the buyer wants, or else you get the item back, and lose out on shipping.  And who knows what the buyer did to your gear.  I had a 70lb center channel a guy wanted real bad.  I told him I would not ship it.  He begged and begged, and I finally gave in and packed it up and shipped it.  I triple boxed it.  Buyer emailed me and said the speaker was damaged, but the box was perfect.  He filed a claim with paypal, and I was out the money, and was returned a center speaker that looked like it was dropped off the roof of a house and with blown drivers.  I ended up just throwing it away, and was out $1,000.