Need speaker suggestions - Onkyo 708 AVR as the core.

[reachprak]

Hi,

I'm new to the receiver+speaker aspects. Managed with integrated Hi-Fi systems till now. Working on moving to a receiver and speaker system. Onkyo 708 ordered and on the way.

1. My living room is around 15" x 20". I've a 50" Panasonic V20 Plasma, a Sony Bluray player, Cable STB giving out component, mp3 player. Planning to convert my PC into a media server.

Need help with:
1. What is a good speaker setup? Budget around $1000. Front speakers have to be bookshelf mode. No space for towers.

2. Will the speaker recommendations change if I hike the budget to $1500?

3. Planning to connect the setup in phases. Is there a difference in the audio quality between 2.1/3.1?

Predominant usage: Music, cable, Movies in that order.
Music preference: wide variety. Sample favourites: Miles Davies, Pink floyd, Dire straits, Alternative music, Pearl Jam, Indian classical, Western classical etc.

If possible, could you highlight the model numbers too as this will help me identify reviews.