[tonyvdb]

No matter what system you go with (either projector or display) you will need a receiver, as you did not list the need for one either you forgot or you have one. Right now Onkyo has the best bang for the buck and a decent receiver can be had for around $500.

 

[tonyvdb]

Ok, just so you have a better idea a receiver is really the heart of the home theater system as it does all the video and audio processing. Your DVD player must have some sort of amp if it came with its own speakers however it will not be a great idea to continue using them with the player. I highly recommend looking at the SVS SBS-01 System for under $1000 you get a fantastic set of speakers and a good subwoofer.
Is it possible to turn the seating so that your screen is on the 8' wall and your seating is located along the 12' wall? This is a much better position to be in as the room acoustics will be better if you sit farther back from the screen along the longer length of the room.

 

[tonyvdb]

Tony, that is a good suggestion to turn around the screen to the 8' wall. I will definitely explore that option.

Some queries for now:

1. Is a ceiling mounted projector a good idea? or should I stick to one mounted at eye level ?
2. How big a screen size is good for my room dimensions?

1) Ceiling mounted is the only way to do it properly. A projector is designed to be placed about 6.5' off the floor.
2) For your seating being that it wont be more than 10'-12' back from the screen I would not go larger then about a 96" diagonal 16x9. That is also about the maximum size that most projectors will go at that distance.

 

[tonyvdb]

Where abouts on this big blue ball do you live Nag?

Maybe we can find some other options for you.