I have an Epson PowerLite Home Cinema 720 projector. And an Onkyo HT-S5300 surround system.
The Epson puts out a great picture, although the pictures don't really do it justice. And in Blu-Ray it's even better.
The surround is 7.1, but I don't even have the side speakers hooked up. With a 12'x18' room I don't think I need it(just got a good deal on the system). After doing the initial set-up with the microphone the sound is amazing. I can hear things on the side wall as they go by. The fronts and rears really blend well without the side speakers.
Do some shopping, you can do a nice theater for pretty cheap. My projector and surround are factory refurb's. My Blu-Ray player was a last model 50% off sale. Got all my cables from Monoprice(same cables, without paying for a name). And just did a lot of online homework on theater forums.
This is the second one I've built, and I'm still not done. Planning to build a full cabinet across the floor of the front wall for the A/V equipment, and sub, so they are all enclosed in one unit. And add some more decorations to make it look more like you are in an old hangar.
The screen can be as much or as little as you want. I personally don't see any need for special $10000 positive gain motorized screen, or even a $500 screen. Some screens can actually reduce your image quality. A lot of people are using blackout fabric as screens, there are a bunch of companies and individuals that have come up with special paint mixes for screens.
I did a bunch of research for this screen and ended up using a true neutral grey paint mix, and am very happy with the results for $25, and a lot of wall prep to make it flat.
If you go shopping for a projector, stay away from the multimedia type projectors. Make sure it's for a home theater, otherwise you will have image issues.