Looking for budget 2.1 system.

Your TV has no HDMI output and no analog audio outputs, so you cannot use the Klipsch setup; it requires analog audio outputs from the TV. The only audio output from your TV is an optical output; read the owner's manual.

Your only option is to get an inexpensive receiver with an optical audio input to connect to your TV, and a set of speakers. That Klipsch setup sucks in any case; tiny little mickey-mouse speakers.

I recommend that you get the Denon AVR-1312 receiver, which is $140 at Amazon, and a set of Sony SSB-3000 speakers for $70. I don't see any other receiver offhand that has an optical input for less money.

Save up another $250, and then you can start thinking about a subwoofer. Decent ones will cost you at least that much.

Yup. Just get an optical audio cable to link the TV to the receiver, and you are in business.

The Denon is a pretty decent receiver for the money, and you can hook pretty much any speakers or sub you want to it in the future. It has five amplifiers for front, rear and center speakers plus a subwoofer output, but you will just be hooking up a pair of front speakers to begin with.

The Sony speakers will give you a decent starter set and are decent for their price; if you could afford it, the Polk Monitor 40 speakers are better, but are about $140 per pair.

I wouldn't recommend the 1312. Bare minimum for the Denon models is the 1612 which has Audyssey room correction software. For speakers I would consider the Pioneer FS51s or perhaps the Polk Monitor 40s (bookshelf speakers).

Check out the budget subwoofers thread in the Subwoofers forum here. They have a nice list of quality budget subwoofers at $300 or less.

Fair enough. The BS21s are ok for surrounds. I have a pair of 21s at work in 2-channel. However, I'd have to say it would make more sense to get the BS41s. The Pioneer sub is decent but it doesn't dig very deep for movies. Please check out the budget subwoofer thread. The BIC F12 comes to mind.