Decent audio in terrible room?

Go for high end Headphone system!
or you have just described "Near Field Listening" Check out Cardas Audio's web site about speaker setup.
The cool thing is you can go with a small integrated (save some dollars and provides simplicity).

IMHO, Try a vintage tubed receiver in good to excellant condition, like a refurbished Fisher 500c, mated to a pair of tube friendly speakers like the Triangle Titus. Depending on how well the unit was refurbished you may also need an outboard phono stage. That should answer your problems for underneath $900, or so. This will keep the interconnects, and speaker cables on the inexpensive side, and allow you to play around with different small signal tubes to experiment with the sound (fun). Sound could end up as good as can be expected out of your small room, which has the advantage of not requiring lots of power. The headphone output would be a welcome added plus. Happy Listening.

Headphones are really the way to go, both acoustically and financially. If you go with loudspeakers, I might suggest a listen to the Von Schweikert VR-1s. To keep the peace in my household and to even get a stereo system in a small room, remodelled as a library, I placed these in the bookshelf. Remarkable sound! Very three dimensional with great height and breadth, their placement notwithstanding. I use a Creek 5350SE and have been very happy. Good luck.