My Suggestions
The Display:-You can still go with a projector... my first home theater was a living room and I hung the screen infront of a bay window... My current home theater room my screen hangs 19" away from the wall. You can an electric remote controlled ceiling hanging screen from monoprice.com on the cheap (it's burried in there but it's there). They made fantastic first projector screens. As for projectors there are lots of options in lots of different price ranges see me when you're ready to make that step. If you do go front projector keep in mind that you'll need to keep the room DARK (aka: light controlled). if this isn't possible then I highly recommend against a projector because then it will just look like washed out ass all the time.
Projectors also have a high W.A.F. because you roll up the screen and you can use that fireplace behind it without worrying about damaging anything.
-Rear Projection TVs have total crap viewing angle so you basically need to be seated in a bowling alley with the TV at eye level. Also they' need a fairly well light controlled room as well... Don't go with one unless you meet these two criteria. Also RPTVs (unless they're an older CRT based one) will need their bulb replaced within 2000-4000 hours just like a front projector... most people don't realize this.
-Plasma/LCD I'd highly recommend Plasma/LCD displays for anyone not going with a front projector. Plasmas have fantastic color and contrast ratio but be wary of the native resolution vs the advertised resolution, a lot of them have rectangular pixels and rob you of picture quality. LCDs are great because their cheap and have a decent HD picture for the price, plus their light.
In general 36" and below go LCD above 36" go Plasma, just keep an eye on the native rez.
Another thing to keep in mind, is that a Plasma is VERY susceptible to temperature changes... they don't like them one bit. So if you put a plasma above the fireplace, don't plan on using that fireplace ever. LCDs don't have any technical problems with heat (though they ghost like crazy in the cold) Even still plastic doesn't like high temperatures
-No matter what you get plan to hire an ISF certified technician to tune your display. it usually runs about $300 and it's worth every penny. The OTB (out of the box) performance of most displays is tuned to look good on a store shelf under florescent light and "popping" in comparison to their competitors, which means the real image is junk once you get it home. a certified tech will have access to menus and setting that the consumer doesn't even have the tools to tweak. Do it after you've got a hundred hours or so on the display so that it's broken in and the tune will last longer.
The Sound System:-Don't cheap out! Display technologies will come and go you spend $2K on a TV today you'll be replacing in 5 years... You spend $2K on a quality set of speakers, you'll hand them down to your children. Why people cheap out on the sound system is beyond me. IMO you should spend at least twice on the sound setup then you do on the display because it will last you at least that much longer. Personally I'd rather have a quality piece build surround sound system and crappy 25" CRT then an HD display and tin can stereo. Maybe it's just me but for my money I get a more engrossed in the game/movie when the sound is there... the picture is secondary.
-If you do buy a high quality receiver get one with HDMI... I'm completely serious. it might not have the widespread support yet but one of the biggest "Features" of HDMI is the single cable system and you loose that entirely if you don't bother getting an HDMI receiver. Not to mention the new audio formats that are supported in WHATEVER next gen movie format wins will only be capable through HDMI.
-Don't shop at big box stores find a specialty shop in your area, read reviews online... do your homework... shop the world and once you decide on a device THEN check to see if your local big box carries it. If not, get it wherever. Check out AC4L.com for some well priced refurbished units (they still have a warranty so why not save a buck).
-Stick to quality brands... I'm partial to Denon and Marantz because even their lowest end stuff is still amazing, Brands like Onkyo, Sony and Yamaha are hit or miss, they make some good stuff but they also make a lot of junk. Bose is right out because they're useless without their speakers.
-As for speakers Bose is a joke, you're paying for well engineered plastic tubes and an army of $4 paper-drivers, not to mention it's all designed to lock you into their brand. For speakers I'm partial to Cambridge Soundworks, though I'm not sure if they have stores anywhere but the North-East and California. Dyna-audio is good too as is Boston Acoustics. Polk is pretty good though not my taste personally.
-Check out a trade show if you can, I know there is a big on in Montreal every year, and there are a few more throughout the country, you get to test out a lot of equipment see what you like and what you don't like. There are a lot of small companies that make well priced amazing sounding equipment. Most brand name stuff just caters to the fast sales for the big box stores.
-Plan to buy all the speakers from the same brand (the Subwoofer is exempt). The reason being that they'll all use similar drivers and similar crossover circuits. This means that the sound will be matched all around. HITB speaker sets are usually only good enough to drive sound through a cubicle... leave them on the PC where they belong.
The Media:-Don't buy HD-DVD or Blue Ray yet... if I had to guess I'd say BluRay is going to win but right now the winner is apathy because more people are buying into apathy then either format. It's still way too early to buy either and there is a possibility the neither will win. You'd be better off buying a 360 and renting your HD movies from the marketplace until the format war blows over (alternatively: Apple TV).
-Buy a good quality Upscaling DVD player... I like OPPO it's a lesser known Chinese company but they basically give the big 'ol middle finger to the MPAA in terms of their rules and regulations... you'll get upscaling over HDMI or component (AFAIK the only player that can becides a hack Xbox 1), SACD and DVD-A music playback, region free. They also use the Faroudja DCDi which is the absolute best scaler money can buy for upscaling 480i/p content.
Cables Switches Adapter-Don't buy Monster Cables... they're crap they really are (and I used to be a big monster fan too). The only thing of theirs worth buying is speaker cable.... that's about it You're better off getting most if not all of your stuff from monoprice.com... or building your own cables (but it's not any cheaper and a lot of work)
-Buy a Power conditioner. Don't buy a monster one unless you decide to get a UPS then get the Monster UPS 500. DONT use a PC UPS. Audio Authority makes some reasonably priced power conditioners that work fantastic. We're not talking about safety here (though that is important) we're talking about image quality.
-Don't spend more then $5 a foot for ANY cable PERIOD
-Avoid using any adapter or switch boxes if possible, try to get a receiver with all of the inputs you need. Also ensure that the receiver or switch box is capable of busing Component/HDMI at FULL BANDWIDTH else you'll get more noise the higher your resolution. If you can't get a receiver that does what you want. Audio Authority makes some good stuff, but it's expensive and limited in capability, Monoprice makes a fantastic HDMI switch box, and if you need a more feature filled/lower price Component switch box I like Psyclone.
-Avoid using adapters whenever possible, but if you do need to use one make sure it's a straight through adapter (no circuitry) and has gold or gold plated connectors.
-Use gold or gold plated banana plugs on all of your speakers... if your speakers/receiver don't support banana plug connectors... then you bought the wrong ones.