Which is better: separates or receiver?

You've gotten great advice already....if you want convenience, are likely to not get the upgrade bug over time, and want the system for movies as much as music, I agree with the advice to buy one of the top-of-the-line AV Receivers (my preference is Denon). You'll get excellent performance for years with a minimum of hassle and complexity. If you're willing to look at used equipment (a great approach IMO), you can get a lot for $3000 in separates. You've been given some good things to look at - I'll add a possible combination of a used, decked out Lexicon DC-1 pre/pro and a 5-channel Rotel amp. The DC-1 is somewhat dated, but it's very powerful yet a joy to use - fabulous for movies, very decent for music. You can find them for about $1500 used - look for one that is upgraded to v4.0 software - the software improvement is worth having and the new remote is a major improvement. As somebody else mentioned, receivers depreciate quickly out of the box, so if you're looking at upgrading down the road (even if you don't realize yet that you'll want to), separates offer more options.

Kt, and jerie make good points. If you max out your budget and get used gear you can get a good seperates system, but if you also think about getting a near top of the line receiver like the Denon AVR5700
second hand as wel,l you can have almost every function you need at under $1400, leaving some room for cables. Michael Fremer stated in the Stereophile Guide to Home Theater that the DAC's in the 5700 were worth the price of the receiver alone and that it reminded him of the awesome Linn system for 5.1 channel use. It is very easy to think of the budget without cables, but if you choose wisely you will get a significant improvement in sound. IMO they don't often come cheap, I have heard many very good cables that are reasonable, but no great cables at the lower price ranges. To be specific I think you may need to spend at least $750 on speaker cables and interconnects to get it right.

By a wide margin the best bang for buck is a receiver. Denon, Onkyo/Integra, Yamaha, Pioneer/Elite, Sony, etc. all make perfectly usable products that will stand up to all but the most intense sonic scrutiny. Be sure to match them to reasonably efficient speaker whose impedance doesn't drop below 6 ohms. My recommendation is to not go over $2,000 on the receiver. Theoretically, separate components can provide superior performance when compared to a receiver, but unless you're willing to provide a dedicated room with extensive sound treatment these advantages will not be realized.

I think that Onhwy61 misses the mark ... a carefully matched system does not need a dedicated room with sound treatment to reach higher than a lesser receiver based system!!! The room IS important, but not likely to mask the difference between systems. My "non-dedicated" room is not a factor when I change something as "subtle" as a cable!! Buy used, shop carefully and you will far exceed a new system at the same price point. Leave a sizable chunk for cabling your system. This I have learned the hard way. If you plan to have any distance at all between any parts of your system, plan on even more for cables.

If you go the receiver route check out the tread on b&k vs denon and you will find 28 to one in favor of b&k.