Before you start looking for your home theater audio system, first determine whether you're mostly going to watch movies and TV or listen to music.
Ex-movie theater projectionist Steve Guttenberg has also worked as a high-end audio salesman, and as a record producer. Steve currently reviews audio products for CNET and works as a freelance writer for Stereophile.
Let's start with the most common fallacy about audio: good sound is good sound. Movies and music have very different requirements, so I recommend first acknowledging your preference for movies or music, and steer the system's performance strengths one way or the other with the right mix of speakers and electronics.
How different is movie sound from music? Let me count the ways: Today's films boast nearly unlimited soft-to-loud dynamic range; dialog is mixed to the center channel; surround effects may be ambient or point-sourced; and deep-bass demands can be extreme. Just about every feature film released in the last 20 years has a multichannel soundtrack.
On the other hand, most music recordings are dynamically compressed, and deep-bass effects can be nonexistent. For home theater the subwoofer's prime responsibility is supplying room-shaking low-frequency effects. For music the sub needs to deliver pitch-accurate, tightly controlled bass that's perfectly integrated with your speakers. And while there are just a tiny number of new music recordings available in multichannel sound, stereo still rules in the music world.
Movie soundtracks' wide dynamic range is also linked with high volume capability. That ups the power requirements for home theater over music-oriented systems. For home theater sound plays a supporting role--video quality and onscreen action grab the lion's share of your attention--so you might miss or be more able to overlook sonic deficiencies. But a music-oriented system's ability to entertain and engage us succeeds on sound quality alone, so tonal accuracy and sonic integrity--or the lack thereof--are more critical and become more obvious.
Of course most home theaters are dual-purpose, home theater/music systems. That's reality, so consciously steering the sound balance toward your preferences would be a smart move. I probably listen to 10 hours of music for every hour I watch movies.
Before you can select either speakers or electronics to drive your system, take a good look at your room. If it's big--say on the order of 700 square feet or larger--and you crave a visceral, feel-the-sound-in-your-bones experience with movies and music you should seriously consider buying full-size, full-range speakers, and audio separates with a powerful amplifier instead of a receiver. If you're serious about your movies, room size should be considered.
On the other hand, if your room is small, say 12 by 18 feet, and you never need to feel it shake, a small satellite/subwoofer system and a decent $300 receiver should be adequate for home theater and music. Room size and volume capability go hand in hand and should be linked to your system's performance/price ratio.
If you're primarily using your home theater for movies, consider putting more money into a better center-channel speaker, one that's timbre-matched to the other speakers, and the best possible subwoofer. If music is the mainstay, put the majority of your speaker budget into the front left and right speakers. And, if you only watch an occasional movie and mostly listen to music you might even consider just buying a pair of full-range tower speakers, and build a stereo home theater.
What's the "best" speaker or receiver? Good question, but there are too many variables to consider and then come up with useful recommendations. Based on my experiences as a hi-fi salesman for 16 years, I found that my customers' preferences and budget dictated the gear they bought. Of course, my opinions of specific products are covered in my CNET reviews. Throwing caution to the wind, here are a few recommended systems: the mostly movies budget home theater I like would use an Onkyo TX-SR309 receiver ($299) and an Energy Take Classic subwoofer/satellite package ($399), and for a mostly music budget home theater, I'd use a Denon AVR-1912 receiver ($549) and a Pioneer SP-PK21BS subwoofer/satellite package ($399).