Where do you start? Is there any hope?

There is always hope. I have a friend who has assembled some really great sounding systems for under $50 from yard/estate sale components. It's not easy, he gets there before anyone, and there are some risks involved, but it can be a avenue, and probably the cheapest way to go. Another strong aspect is if your newspaper lists stereo equipment, many people spend up to $1500 for a full system, and need to move, or something and you can easily get a system for under $500. A lot of it is going to depend on what you want to do, you can't expect perfection on a $500 budget. But all the main focus should not change, and that is to make you happy with it. It would even possible to assemble a real decent system of speakers, amp/receiver, and a DVD player from ads here on Audiogon. Shipping may add some costs, but the savings on real decent entry products does exist here. Try negotiating a little maybe. You're not going to be getting real fancy in the cabling, but again there are lower priced options available. See if anyone you know has any equipment they may be selling sometime. Listen to some things if you can, find out what you don't like.

separates?...highly highly unlikely...i would break 500 down into 250 for speakers (used) 150 for an integrated amp (also used) and 99 bucks for any new name brand dvd player with a bit of a warranty. with the last dollar...buy a lottery ticket because you'll need at least 30 bucks more for all the cables...and that is on the CHEAP....and hey...you might strike it big with the lottery and get those seperates...start shopping the classifieds here.

I have a older set of speakers and some wire and rca they are not top of the line, but I think they are nice for now. The cables are cast offs from friends. Mostly monster, AR, RCA gold, and audioquest.

How about this approach? Try to find an old Denon CD player or something similar with a variable volume output, so you can attenuate the volume without a preamp. You can probably pick up something decent sounding for pretty cheap. Then look for an old adcom power amp, like one of the old GFA 535's. They were only $300 new, so if you can find one, that shouldn't set you back too much. Nextyou might consider some small used monitors like the new Epos 3's, that later on you could rotate into a home theater set up, at least for back channel speakers. I could see how you might put this together for $500-$600. It would get you into the separates manifold, give you sound you could live with for a while, and let you upgrade as you have the cash. Later on you could add something like a McCormack TLC-1 preamp, a newer CD player, etc. Most set ups don't need gain from the pre amp to deliver more than adequate volume, especially with reasonably efficient speakers.
Back in the late 80's, I ran a Denon 1520 CD player through its variable output into an Adcom GFA 535 to some ADS speakers. It was a pretty decent sounding bare bones $1500 system. Go Bucks!

Brownsfan........Jeeeeeees
Fot a newbie thats pretty darn smart there!