Spend more money on the amp or the pre-amp?

I do agree with thehorn's position regarding the theoretical side. The amplifier/speaker match is critical to best performance.

Though years back separates were considered better than integrateds, these days that comparison does not always hold true. Especially considering the more modest high end systems, as are your 2 systems.
 
Regarding your system 1, I would take your speakers and your 304 to a dealership and compare with different integrateds/amplifiers. Best way to hear for yourself.  That said, the character of a system can be altered to a greater extent with a change of speakers than the amplification.    

Reading through this thread, I realize that $800 is exactly what I spent on the pre and power amp in my living room system. $450 for a heavily upgraded AES (Cary) AE-3 tube preamp and $350 for an Adcom GRA-5500. Both used, of course. So for me, about 56/44.

Of course, after buying upgraded tubes and getting the preamp tube sockets repaired, the cost for the preamp was greater. :-)

 

Not sure what your audio approach philosophy is here "lemaze", but I can tell you this, go after two rabbits at the same time - you'll wind up with neither one. In other words 1 good system is better than two mediocre.

 At any rate it seems that (system one) is what you're trying to optimize at the moment, and I'll speculate that the Kef Q's are being used because the room is small. (the room is an intricate part of your system). A canon will never sound good going off in a phone booth, inversely a pop gun won't get it done in an open field. Synopsis: optimize your room.

 Secondly .... the NAD has to go - period.

I've been using separates since 1980, a NAD was my 1st pre-amp. Twelve years later I started A/B-ing multiple pre-amps at a time in my listening room, the NAD went to the curb. NAD's are entry level Hi-Fi, they are chinky, grainy & bright in comparison to what's out there. It's time to move up.

 Since 1980, some of the most pleasing systems I've heard used Integrated Amps. So although I use separates I would not "DIS" Integrateds. Although the Kef's are small, they are only 89db efficient, so a strong hand will reproduce the music with more authority, better circuitry will render more intricacy, clarity, and a lower noise floor.

 May I suggest (used) a Classe' Audio CAP-151, a Krell KAV 300i, or 400xi, a Bryston B100, and I strongly recommend giving the Rogue Audio Cronus Magnum II with the KT 120 tubes an audition. http://www.enjoythemusic.com/magazine/equipment/0816/Rogue_Audio_Cronus_Magnum_II_Stereo_Integrated_...

 Anyone of these Integrated Amps should mate up with your Rega Cd player very nicely. Over kill? Not if you consider that you can swap the amp with system two, that you`ve now opened the door to actual Hi-Fi, closed the door on Mid-Fi, and can now use virtually any speaker you want.

Hope that helps.

Thank you for your thoughts thehorn!  Much appreciated. 

Though I cannot afford the jump from the NAD ($120, Craigslist) to a $1000 integrated tube amp. Though I will certainly keep those options in mind. :)

I'm more interested in the best possible "mid-fi" I suppose. 

I love the KEFs and they seem to be suited to my room (10'x15'). But I have the bass turned halfway down on the NAD and they still sound a little muddy sometimes. 

Another thought I had was to use the NAD as the amp and get the best sounding $200 preamp I could find. 

OK lemaze .... here's another suggestion.
Use the volume control on your Rega & run it straight through an amp.
For $200-$300 dollars you can pick up a used Carver M400, or a David Hafler DH-200.
An audio steel @ twice the price & both will put the NAD to shame.
I still have an M400 on the shelf, even though I've been using a Classe' DR9 for 10-12 years.
I've kept it as a back up for when I ship the DR9 back to Classe' Audio to get recaped.