Jon,
Since no one has yet replied to your post, i'll see what advice i can pass along.
1) You can use any number of speakers for surround sound. You do not need a subwoofer although for movies it does help to hit the lower notes with higher sound volumes (SPL) than most towers or bookshelf style speakers can produce.
The center channel is great for dialogue but your 2 front speakers should be able to create a perfect stereo image such that the dialogue/music should 'sound' like it is coming directly in the centre of your listening area.
2) There are many receivers for under the $500 (USD?) mark. Stick to good brand names like Yamaha, Denon, Onkyo, NAD, Rotel (may not be under $500 here), Pioneer and Harmon Kardon.
Many have already been discussed on these forums. Try some searching.
3) Dedicated surrounds vs. direct speakers for surrounds becomes a personal preference. Again this has been asked and discussed many times on the forums.
4) Going with the M40s over your present speakers may not improve the sound at all. It will however sound very different. All we can tell you is how the M40 sounds in character (unless someone has heard your present brand and model at some other point in time but my guess is this is unlikely). Try a seach for M40s and see what comes up.
5) Kids in bed? Not a concern. The volume knob on your receiver will take care of that.
