To some a large picture is important and quality is not as important. To others, quality is important and size doesn't matter as much. I recommend you balance what you feel you may want or need against the current mainstream offerings.
In my mind there are several aspects of a screen which are important to examine; be that LCD, plasma, projection or old school CRT. I will discuss each point briefly.
Resolution: The resolution your screen can produce will be very important, as it will help to create what you feel is a sharp and clear image. Right now the high-end of the industry is targeting what's called "1080p", which references the vertical line count and how many of those lines are being drawn at a time. High def video may or may not target this maximum. As example, Blu-ray movies are always 1080p, whereas some high def video you receive over the airwaves may only be 720p. For the best possible experience I recommend getting a 1080p certified screen. However, since the pixels and space between pixels become smaller as the overall screen size gets smaller you would very likely be fine getting a 720p certified screen for smaller screens. I'd guess the cut-off to be somewhere around 28" (though many in the industry will reference a much larger cut-off point.)
Brightness: The brightness represents how many steps there are between what is absolute black and what is absolute white. Thankfully, most current LCD screens are basically good in terms of this rating, but you may want to double check the numeric rating. The average brightness rating is 350 cd/m2, while the low end you would want to consider is around 300 cd/m2 and the high end gets to about 450 cd/m2. A higher number is better, but it doesn't guarantee you will enjoy it more.
Contrast: Contrast ratings are highly controversial, as many manufacturers have ways for their screens to show more colors than they can produce by mixing colors. Additionally, while this value can vary greatly you may not be able to perceive a difference. Part of this may have to do with the fact that manufacturers sometimes report two different numbers without referencing which they are using. As example, I looked at two screens, one was rated at 15,000:1 and the other 30,000:1 and there was an almost imperceptible difference between them. While larger numbers are better, this value isn't really critical as long as it meets a minimum enjoyment level. I would guess that minimum is somewhere around 8,000:1, which we reached about 5 years ago.
Bit count: While it is often difficult to discover an LCD screens bit count it is sometimes noted. The higher the bit count the better, as higher numbers represent a greater true color representation. Higher end screens these days are 10-bit while most are 8-bit. (Note that this is different for computer monitors, being 8-bit and 6-bit respectively.)
Hz speed: This roughly translates to the number of frames per second the screen can draw. A 1080p screen will meet a minimum of 60Hz, while higher end screens are now supporting 120Hz. The difference between these two, however, is very small in quality, but can sometimes be very noticeable in price increase. While a 120Hz image is better, it really only has a very subtle effect in terms of sharpening up very fast moving images that may normally look a little blurry. (Such as flying over a field.)
Inputs: The number of inputs is becoming less and less important, as it has become the receiver's job to take multiple inputs and send them out via a single (HDMI) output. The only reason I could possibly think of to concern yourself with the input count would be if you wanted to leave an aspect setting on one particular input a certain way, as basically all screens have switchable profiles for color and brightness settings. However, input aspect ratio is very often changed with a simple press of the button.
Tech; LCD vs. Plasma vs. Projection: In my opinion there really is no need to choose anything but LCD. LCD has a great color pallet, great black levels, zero burn in issues (a key point for gamers) and it is the lowest cost of all three tech. You can get a very large image with a projection system, but you then need a special screen costing hundreds more, and LCDs go up to 52" in mainstream consumption, so that's plenty large. (I believe 110" is the largest I've heard of for non-mainstream consumption.) There should be an LCD size to make everyone happy.
720p certified:
I recommend 1080p for living room viewing, however, a 720p screen would be fine in a secondary room, or in a bedroom, where high quality enjoyment isn't as much of a priority, or where smaller size is more important than the highest quality picture. I do not, however, recommend going too small (say, below 26").
Samsung LN26A450 - 26"
Samsung LN32A450 - 37"
1080p and 60Hz certified:
1080p screens are good for use in all conditions. They provide the best resolution.
Samsung LN37A550 - 37"
Samsung LN40A550 - 40" - One of the best choices for price-to-performance.
Samsung LN46A550 - 46" - One of the best choices for price-to-performance.
Samsung LN52A550 - 52" - A great choice, but possibly a bit too large for smaller rooms.
1080p and 120Hz certified: Often 120Hz screens are only a small amount more than 60Hz screens when they are on sale. Be sure to check prices very carefully and never rush in to a decision. You may find that by watching prices over a few weeks you get a feel for the price ranges for the screens you are looking at and can see if they seem too high or too low on any particular day.
Samsung LN32A650 - 32"
Samsung LN40A650 - 40" - One of the best choices.
Samsung LN46A650 - 46" - One of the best choices.
Samsung LN52A650 - 52" - A great choice, but possibly a bit too large for smaller rooms.
1080p, 120Hz certified and backlit:
Backlighting is a fairly new technology. As such the gains may be minimal, yet the price increase may be fairly large.
Samsung LN46A950 - 46" - The very best choice at a good size, but that experience comes at a high price tag.
Samsung LN55A950 - 55" - The very best choice and largest size, but that experience comes at a very high price tag.
Projections:  While OLED (Organic light-emitting diode) technology will totally dominate everything that's out right now in every way, it is still very new and very expensive at this time. I am betting it will be 2010 before we see OLED screens entering into the higher end of mainstream, if not 2012 before OLED screens become truly more affordable.
Everyone hears a little bit differently. The sound experience is a blend of tonal range, tonal clarity, sound positioning, and proper timing between those positions. In order to get the most out of your sound I recommend a 5.1 system with sub-woofer. There are several 7.1 systems, but the industry hasn't produced much for 7.1.
Check to consider if you want/need up-conversion with your receiver. This is the act of taking one type of input and then outputting it through a higher output type. The order is as follows; Composite, S-Video, Component, HDMI. If, for example, you have a Composite line in and HDMI out to an HDMI monitor you must have an upconverting receiver. If not, you will also need to send out a composite line to carry the signal to the monitor.
Note that uncompressed audio, which is the best audio source, as well as Dolby TrueHD and DTS-HD, must be carried to the receiver via an HDMI cable. All of my recommendations will be HDMI 1.3 (or higher) certified for this reason. The good news is that (as of about year-end 2007) HDMI receivers are now very low cost compared to when they were first introduced.
Any of the recommended receivers should have plenty of power for any size room. Do note though if you are buying a complete set you will want a 12" sub with more power for a larger room size, while a 10" less powerful sub will be fine for a smaller room size. (Though if you can afford it, more is always better, as you can often times simply turn it down.)
Note that you may want to go to a store to listen to speakers before choosing a set. People's ears are all a little bit different and you may prefer the sounds of one system over another.
Receivers, non-upconverting:
I only recommend non-upconverting recievers if you don't have the desire to some day run all output through a single source. If you would, or may in the future, I recommend you get an upconverting reciever so you have that capability.
Sony STR-DG820 - 100 watts, Dolby TrueHD and DTS-HD, 3 HDMI
Onkyo TX-SR606 - 90 watts, Dolby TrueHD and DTS-HD, 3 HDMI
Receivers, upconverting:
I highly recommend an upconverting receiver. Upconversion takes any signal type and sends it out of the receiver via the highest connection type (in this case HDMI). This means that you can have several inputs of various types, and run it out of the receiver via a single HDMI cable to your monitor.
Sony STR-DG920 - 100 watts, Dolby TrueHD and DTS-HD, 3 HDMI
Onkyo TX-SR806 - 130 watts, THX, Dolby TrueHD and DTS-HD, 3 HDMI
Onkyo TX-SR876 - 140 watts, THX, Dolby TrueHD and DTS-HD, 4 HDMI
Onkyo TX-NR906 - 145 watts, THX, Dolby TrueHD and DTS-HD, 4 HDMI in, 2 HDMI out
Speakers, complete sets with subs:
Complete 5.1 speaker sets with sub-woofer. A good choice for someone who wants an easy all-in-one kit who doesn't plan on upgrading individual pieces.
Polk Audio RM6750 - A good lower cost speaker set.
Polk Audio RM6880 - A good speaker set.
Speakers, combined sets:
Complete 5.1 speaker sets made by combining 5.1 speakers with a sub-woofer. The advantage to mixing and matching is that pieces can be independantly swapped out. However, the disadvantage is that you need to be sure that the pieces work together or you risk having timing or tonal range mis-matches.
Polk Audio set - Polk Audio RM75 and Polk Audio PSW10 35w (200w) 10" Sub
Polk Audio set - Polk Audio RM95 and Polk Audio PSW505 300w (460w) 10" Sub
Klipsch set - Klipsch Synergy Quintet III and Klipsch Synergy 55w (225w) 10" Sub or Klipsch Synergy 105w (440w) 12" Sub
Klipsch set - Klipsch Synergy Quintet SL and Klipsch Synergy 300w (650w) 12" Sub
Speakers, satellite speakers: You can add on a few more speakers if you want to bump your system up to 7.1 capability.
Polk Audio RM6751 - Sold individually, buy two.
Polk Audio RM7 - Sold individually, buy two.
Klipsch Synergy SS.5 - Sold as a pair.
Klipsch Synergy S-2 - Sold as a pair.
Speaker wire & wire cutter
When purchasing speakers like this you will need speaker wire and a wire cutter. With speaker wire you want to look for copper wire, which will continue to carry the signal if it oxidizes. Also higher guage size will carry a stronger signal. Look for 16 guage (or higher).
Monster Cable 16 guage THX - A spool of 100' of THX certified wire.
Wire stripper/cutter/crimper - You'll need this to cut the wire and to strip away some of the plastic cover.
Speaker stand These should work just fine for most systems. Remember that you will need to get two pair for a 5.1 system, or three pair for 7.1. You can rest the center speaker on the same surface as your monitor.
Atlantic 77305018 - Sold as a pair. Buy two for a 5.1 system, or three for 7.1 system.
Projections: 
I suppose it's possible 7.1 will become more adopted within the industry in the future, but at this time it really isn't a feature you will feel you are missing if you stick with 5.1. Very few of my Blu-ray I have in my collection actually support 7.1, so even if I had a 7.1 speaker set most of my collection would not support it.
Blu-ray is the way to go for the best entertainment media. (Not counting digital download which meets Blu-ray quality.) Resolution goes up to 1080p, which is roughly just over 5x the resolution of standard DVD, and audio goes up to uncompressed 7.1.
I have to say that 1080p and 5.1 uncompressed audio is truly a beautiful thing. (I haven't yet set up 2 more speakers to get the full 7.1 my system can do.) The sounds my system have produced have been so realistic that cats have completely flipped out. (Not the curious 'What was that?' they sometimes do, but full on 'Holy poop! This bad noise is happening and I'm genuinely scared!')
The important thing to look for with a Blu-ray player is upgradeability. Many will feature an Ethernet port, allowing you to hook it up to the Internet, which automatically means they can be updated, but this can also be done by a media disk. What is important is that it has some kind of memory which allows for updates/upgrades. This is important as compression standards and new features may be added later on.
A new feature called "Blu-ray live" or "BD Live" has released which gives you extra content and features if you connect your player to the internet. These players can also stream video from sources who partner with them, such as NetFlix. All players listed on this site are BD Live compatible.
Blu-ray players:
Be careful when purchasing a player. Be sure to check that it has the capability to be upgraded either through the internet or via an upgrade disk. All new players should have an upgradeability feature, but you may want to check to be sure.
Samsung BD-P2500 - A solid Blu-ray player with upgradeability.
Sony BDP-S350 - A solid Blu-ray player with upgradeability.
Sony BDP-S550 - A solid Blu-ray player with upgradeability.
Playstation 3, 80 gig version - While it may seem an odd choice to have a game system as your main media player, the Playstation 3 was the first affordable player on the market. At this time it is still one of the better choices as you get media playing, games, and an online network where you can download movie trailers or game demos.
Media purchasing:
Be sure to check prices when purchasing Blu-ray. Always look at various sources who sell the item you are looking for as prices may vary quite a bit.
Amazon - I've found that in nearly every case Amazon has the lowest prices, particularly if you are an Amazon Prime member and get free two day shipping.
Media renting: Several places rent Blu-ray movies, but I prefer NetFlix. I recommend the 'three at a time' plan, and positioning movies from different categories in your queue. This way you are almost always assured to have at least a couple of different movie types to choose from at any given time.
NetFlix - I've always enjoyed my subscription when I've had it active. All you need to do is activate your account for Blu-ray and you are good to go - movies will automatically be set to Blu-ray if they are offered in that format.
There is much debate on the quality and cost of HDMI cables. Theoretically any cable which can carry the signal should produce one of good quality, being that HDMI is a digital source. There is really very little true data determining if the more expensive cables truly are better quality, so the decision is really up to you.
I recommend you look for HDMI 1.3 certification and gold plating to ensure that you have at least the basic standards covered for the best audio and visual experience.
HDMI:
Belkin PureAV - AV22300-03 - 1 meter length.
Belkin PureAV - AV22300-06 - 2 meters length.
Monster HDMI 1000HD - 1 meter length.
Monster HDMI 1000HD - 2 meters length.
Over time I've gone back and forth on being a console gamer and not. They are most certainly a way to gather people together and have some fun. 
Consoles: Here are a few thoughts on each of the current generation of consoles.
Nintendo Wii - Nintendo has extremely strong support from the developers, as it is the easiest system to create games for. The Wii targets a more casual gaming audience, so you often may have a shorter game play experience, but these are highly enjoyable and offer a different kind of gaming experience due to the Wiimote controller. Games for the Wii also often target groups of players. If you have friends who visit often and like to play games together, this could be the console for you.
Playstation 3, 80 gig version - The PS3 includes a Blu-ray player, which is a great feature if you want to have games and Blu-ray movies. It also has a hard drive, which makes it fully upgradeable in terms of keeping the Blu-ray codex current. The Playstation network is fair, offering game downloads, movie trailers, and some additional content in the marketplace.
Xbox 360, core arcade bundle - The Xbox 360 has strong online support, both in terms of downloadable content and the marketplace (videos, music downloads, etc.)
I recommend you protect your investment in home entertainment with a good surge protector. I think a basic one should do, but if you live in an area which has a lot of storms or outages you may want to look for one with a higher level of protection.
The Monster Cable PowerCenters act as a surge protector as well as doing additional fancy power related things, such as cleaning the power, which protects your system from signal degradation and damage that isn't surge related.
APC PF11VT3 - A basic surge protector that works just fine for surge protection. 11 outlets.
Monster Cable 1800 PowerCenter - A very advanced device which cleans the incoming power, removing noise that can degrade signal quality, as well as protecting your system from various potential signal noise damage. 8 outlets.
Monster Cable ir2550 PowerCenter - As above, with 11 outlets.
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