Option 1 is probably best on a budget.
Option 3 is definitely best IF you buy the RIGHT digital processor. The list is short - I would select a Meridian 861 or G65 or G68, or the excellent Theta Casablanca. The room correction these processors provide clearly trumps any disadvantages in going through an A/D and D/A for your analog sources. In addition, the Meridian "apodizing" reconstruction filters correct most CD problems - your CD's sound like SACD or DVD-A's. As a bonus, these processors include the Trifield algorithm which gives you a very good center channel with stereo sources. Stereo imaging and depth of field using this algorithm is better than ANY two-channel system, regardless of the price tag.
Option 3 is definitely best IF you buy the RIGHT digital processor. The list is short - I would select a Meridian 861 or G65 or G68, or the excellent Theta Casablanca. The room correction these processors provide clearly trumps any disadvantages in going through an A/D and D/A for your analog sources. In addition, the Meridian "apodizing" reconstruction filters correct most CD problems - your CD's sound like SACD or DVD-A's. As a bonus, these processors include the Trifield algorithm which gives you a very good center channel with stereo sources. Stereo imaging and depth of field using this algorithm is better than ANY two-channel system, regardless of the price tag.