I'm flying into Prague and returning from Budapest. Our plan is to stay in Prague for 3 nights, Vienna for 4 nights and Budapest for 2 nights. Should I take a train from Prague to Vienna and then Vienna to Budapest or are there other suggestions for travel between the cities. I checked out Rail Europe and if I'm understanding them correctly they're very expensive. Thank you for any suggestions.

Did the same in reverse order in March. It was impossible to find accurate pricing online before we left.
Vienna to Prague was about 40 euro in 2nd class and Budapest to Vienna was much less than that.
You can see my trip (and pictures of the train and train stations) on my blog:
http://www.wired2theworld.blogspot.com

We did Prague to Vienna by bus and Vienna to Prague by train. Although not as comfortable as the train, the bus was comfortable enough,took about the same time as the train, was about one third the price and left us in the center of Vienna.

Trains the best and fastest and easy to buy tickets once there - should have no problem getting on. RailEurope charges more than you'd pay there plus their mailing and order fees of $35 or so on top of the ticket.

We took the hydrofoil down the Danube from Vienna to Budapest. It was great - went through several locks and I think took about 5 1/2 hours. A lunch service is available.