1. You cannot achieve an immersive field of view at reasonable seating distances without using two-piece projection (front or rear, with rear meaning a separate room with a projector and not a consumer RPTV). Here you must leave your TV perceptions behind and think in terms of movie theaters where a good THX cinema provides a 36 degree subtended field of vision in the LAST row. DVD is softer than film so only a few people try to approximate a midle-of-the-cinema feel (I don't think this is unachievable with a CRT and wider than 16:9 screen), instead opting for a back-row experience. Along those lines, if you want to sit 12' from the screen most people prefer something about 8' wide (110" diagonal). Nice home-theater viewing distances for 42 and 50" diagonal 16:9 screens would be arround arround 55 and 65" respectively which doesn't work if the screen isn't on your coffee table.
2. Front projection does not work well without light control. As a minimum you need blackout blinds (they're opaque, but can be nice neutral colors) on all windows. Darker walls will improve the picture farther. Grey screens help some on digital projectors.
3. I think the screen door artifact from LCD projectors makes them unsuitable for home theater use (they preclude sitting close enough to have a theatrical experience). DLPs give a very small percentage of people headaches, and more people notice a rainbow artifact (I get the headaches). Try one before you buy. Reflective LCD (LCOS, DILA) is supposed to offer DLP-like fill without the artifacts. I use a CRT on an 87x49" screen with the front row 11' out. If you can accomodate the screen size (a lot of us think 8' wide is a limit for flat screens with moderate gain), placement (no zoom, ceiling mount even with where you want to sit)), and setup hassles you can't beat the picture quality or value on a used 8" or better CRT with electromagnetic focus.
4. If your stereo speakers can handle the levels you'll want (peaks approaching 100-105dB at your seats) and you have them positioned on your screen wall, you'll want to use them. If your main system lacks the amplification to get them there, you can get automatable speaker level switches. They can be high-passed for home theater use where the bass requirements are excessive (ex: I run my Linkwitz Orions full-range on music, high-passed 2nd order @ 80Hz for home theater). If you find the screen too reflective acoustically, you can use a retractable or perforated screen in front of your preferred wall treatments. Etc.
5. In my room (13' W x 19' L x 8' H) a 7.1 speaker array using Logic-7 was a quantum improvement over 5.1 - the surround field is more seamless and L7 does interesting things with effects.
6. Getting the box (direct view TV) out from between my speakers did huge things for my imaging capabilities. You really want a flat display.
7. 2 good speakers still beat 6 or 8 bad ones. Remember that movies have musical scores and you have a great frame of reference for them.
Have fun! While two rooms would be better, it's not unreasonable to get good audio+video performance in one although one will be somewhat compromised.