I echo ozstamps. Lima is best to transit only. If you must stay, pick a hotel in Miraflores as it is a fairly safe area. San Isidro would be next. I stayed at the Oro Verde there on business and it is one of the few hotels I would be personally willing to pay $200. night for. Swiss run and worth every penny. As with all South American countries, make sure that you are not allergic to guns. You will see plenty.
Cuzco- I stayed at the Picoaga. It was OK for $110. night. You can see a picture at www.hotelbook.com. There are many others listed in guidebooks for much less, but are difficult to book at the cheap "locals" rate on the internet. Be sure tht you have arranged a taxi to the train station the night before, as you will be leaving the hotel well before daylight and I would not recommend wandering around the streets of Cuzco in the dark. This being said, Machu Pichu is worth any inconvenience to see.