Glad to have you here, Zdog. Don't underestimate the potential of your small space -- this recent article might interest you (a 10'x11' dedicated theater).

So you have a $5000 budget for electronics and speakers? Does that include a DVD player? I would suggest not skimping on the speakers -- they are a critical piece of the signal path, and cutting corners there can negate a lot of investments upstream. There are a number of good, reasonably priced brands available: Energy, Boston Acoustics, and Axiom all are well-represented here in the forum, just to name a few, and PSB and Polk are also certainly worth listening to. As much as possible, demo some of the speakers using your own listening material before deciding, because speakers can often boil down to a matter of personal taste. The 950/7100 combo will take $1675 including shipping, leaving you over $3000 for speakers, DVD player, and cabling. That budget should very easily cover a good 7.1 speaker set, a good player, some sort of power conditioner/surge protector (Brickwall, TrippLite, and Panamax are all regularly mentioned around here), a big batch of 12ga speaker cable to run through your walls, and the cabling needed to hook it all up (video to the BenQ, digital audio from DVD to pre/pro, analog audio for pre/pro to amp and for any other sources like DVD-Audio, SACD, or what-not).

Some other thoughts...
Pre/pro vs. receiver -- the pre/pro and amp separates route will allow you more flexibility in any future upgrades, which can be a very good thing.
DVD players -- there are a number of universal (DVD/DVD-Audio/SACD) players popping up. Pioneer has their entry-level universal player (the DV-563) priced under $200, Denon has a very nice-looking player (the DVD-2200) priced under $600, and Yamaha has a new entry coming in March (the DVD-S1500) that will retail for around $400. I'm contemplating the Yamaha myself, but will wait to see what initial reactions are.
Interconnects: Outlaw's PCA's and PSC's (and the new PSSV) are quite nice cables. The PDO optical (if you need one) is a no-brainer in my opinion -- a 1.8-meter optical cable as well built as their is tough to beat at two or three times the $20 they sell 'em for.
Speakers: I am still very happy with my Paradigm Reference speakers; after almost three years, they've become something of a fixture in my system. Recently, I used some Axiom speakers to expand to 7.1 without breaking the bank, and I feel that Axiom has some speakers that compare very favorably to the Paradigm Reference stuff at a price that would easily fit your budget. Both are somewhat typical Canadian speakers -- if when demoing speakers, you find that you like Paradigm and some of the other Canadian speakers, you might consider looking closely at Axiom. Since they only sell online, it is hard to get to listen to them before you buy.

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gonk -- Saloon Links | Pre/Pro Comparison Chart | 950 Review