Help figuring out what the heck to do with a strange room...and purchasing recommendations (1 Viewer)

Ok....I'm just going to throw myself on the mercy of the court and confess all that is wrong with my potentially perfect home theater.
Wife and I bought a house that she fell in love with as soon as we got out of the car. I walked in and thought "Holy crap, it's perfect...except for the family room / home theater." I seriously want to find the architect and strap him down in the middle of the room and make him watch every single episode of Barney and Friends back to back.
I've included a picture below that shows the layout of the room in question. In addition to having a side entrance, off center media nook (*groan*) and a fireplace, it's a fairly large room - it's 16' wide by 18' deep...however, the ceiling is only 8' tall. The entire room is carpet, but as soon as you "leave" the side entrance, it is tile and that area opens into a breakfoost nook and then the kitchen.
I've made a solemn promise to myself to not do what I do when I usually buy electronics: Rely on price and impulse, with the possible input of a potentially ignorant or deceptive sales person and buy a HTIB which I think is awesome for about a week, good for about a month, a decent value for about 3 months, and then pissed off at myself for not researching the question while I live with it for 10 years.
Current situation: Old Onkyo 5.1 system (at least 10 years old) that has served me well, but is simply outdated. It, obviously, also represents all that I'm attempting to avoid here. I need a new DVD player (blue ray, of course), have an x-box 360 that is rarely used and a 50" LG plasma (non smart)...which is not going anywhere - The War and Finance department (aka, my lovely and extremely tolerant wife) approved sound, not video.
So.
Side entrance, in my mind, means no 7.1. However, given the room, I'm struggling with speaker placement. No, wife will not let me eliminate the fireplace and fill in the media nook so I can center the TV on the room. The furniture placement is also non-negotiable...TJ's Happy Place is an ugly but extremely comfortable LaZboy recliner that has been the subject of multiple "discussions."
Wireless rear speakers sound cool and completely unreliable, so I'll run wires.
I want either the new DVD player or the audio receiver to be WIFI (could be wired, but would prefer WIFI unless compelling argument against presented) and DLNA so I can stream music (iTunes now, but flexible) from my NDAS...and I'd like the interface to be simple enough that my impatient wife can do so as well. Ideally would "talk" to iPhone/Pod/Pad either via dock or bluetooth/wifi.
Will be connecting to Verizon FiOS DVR, new blue-ray player, x-box and aforementioned iPhone/Pod/Pad(s)...plus the NDAS for music.
Budget...Department of War and Finance approved a budget of $500 for this project. I've got a slush fund that can supplement that, but would prefer to do this with as modest a budget as possible. I completely understand that I'm asking you to solve the perfect paradox - how can I get perfection for cheap?
Unless a compelling reason to consider a HTIB is presented, I've basically come to the conclusion that a speaker set and receiver are the way to go.
Usage will be 75% movies / television, 25% music. We do have a little one, so Barney and Sesame Street will see airtime on a regular basis.
Don't need it to be insanely loud - we just don't listen like that. Clarity, range, crispness and accuracy are much more important to me than being able to make it feel like I'm up in the club.
Intent is to input everything into the receivere via HDMI and then output video to the TV, audio through the speakers.
Looking for suggestions on:
Receiver
Speakers
Subwoofer (if not part of speaker package)
Blue Ray
Again, either the DVD or receiver should be "smart"...and I'm open to input on ideas as to which shoudl be the smart one.
If you made it this far, thank you very much for your time and suggestions!

You want to spend $500 on this:
Receiver
Speakers
Subwoofer (if not part of speaker package)
Blue Ray
And you want "perfection". First, lower your standards. Second, how big is that slush fund? Give us a hard budget so we know what we are working with.

As the others have said $500 isn't going to come close to what you need for that list of stuff. A $500 budget is squarely in the "HTiB" range - you need to be at least a few hundred more, or closer to $1000 before you start getting into territory where you can get a full 5.1 component system in "one shot" and not have to build up to it as Casey suggested.

Even if you use your current 5.0 speakers, $500 won't get you a network receiver, subwoofer, and blu-ray player - it would get you two of the three, but spreading $500 any thinner (with your goals) simply won't do.

You could stretch that budget a bit further if you're open to refurbished models from retailers like accessories4less.

Finally, technically speaking, the surround speakers on a 5.1 system should be off to the sides of the viewer, not behind (see here). Regardless, your room will not work with 7.1 which requires several feet of space between the listening position and the rear wall.

I agree with the others, but have to add that it's not the side entrance that is preventing 7.1, it's the placement of the couch on the back wall. That placement is also putting you too far away from the monitor (18' is too far back to sit for any size monitor that will fit in that enclosure). If you really want to have a theater room you should move the couch/viewing aera up to approximately where the side wall starts. That would effectively kill the big-a$$ coffe table; but everthing else would work much better.

I've got the same problem, huge missing wall on the side, couch on the back wall, backed up to windows.
This is how real houses are architected, it doesn't take acoustics into consideration.
So what's my solution? Just go with it.
You aren't going to get perfection out of it but you won't mind unless you are an absolute nutter. If you are a such a nutter, build a basement HT and call it a day.
On the plus side it is going to be AWESOME for casual entertaining. Focus on that.

Because it looks dumb in my case. And wastes space. And still wouldn't sound any better because of the huge missing wall that opens up to a kitchen and morning room.
I don't have a good picture of it but this gives you an idea of how big the opening is:

12-EaglesRest-03072 by Kadath, on Flickr

12-EaglesRest-03073 by Kadath, on Flickr