The Denon's upconversion on the video makes life a little easier too. I've tried the KHT as well, nice for the price, but you are right, not quite the choice for a projection system with an AVR-3803.

What about Linn? Haven't dealt with them for a while, but they used to have a couple of nice smaller alternatives.

As another thought, would it be possible to convert the shelf areas you were going to use for the speakers into enclosures for some high-end in-walls? Sounds like the space is a little tight, and any time you put freestanding speakers into tight spaces within a bookshelf you get that whole box within a box effect.