TONS of B&W speakers on audiogon, in most cases about 40% off the new prices. Myer Emco sells these locally so you can listen there then save a fortune bying used.
And a word on using digital out on a cd player, just to reiterate. If you connect to your receiver digitally, you will be utilizing the DAC of the reciever. If you connect to the reciever with analog cables (the red and white ones) you'll be using the DAC on the player, ie. it will convert digital to analog and send it to the receiver.
So, if you have a crappy old cd player, chances are it doesn't have any sort of digital output, therefore you are doing the conversion there. In this case upgrading the reciever will yeild minimal results, but better speakers would help in any scenario.
If I were you i'd get the reciever i mentioned above, a new cd player, probably this -
http://emotiva.com/erc1.shtm, and this would leave you $1200 of you budget for speakers.
Speakers are more a matter of taste, some being laid back and warm, and some being more bright, aggressive and forward sounding. Brands I'd look at in your price range would be B&W, Quad, Paradigm, Swan, Spendor...there are so many speaker makers out there it will make your head spin
OK OK I know i said previously I had litte advice to give but I couldn't help myself.
PS, if you get bookshelf style speakers consider a reciever with a subwoofer out and sub to fill the low end and figure out how to set up the crossovers correctly.
PS - Disregard my reciever rec...it is a pre-amp only you'd have to buy an amp as well. I have a few amps so don't even look at recievers anymore and wasn't thinking straight, so unless you want to go the seperates route get something else.