~$2000 for theater sound -- what trade offs?

[marsal]

Hi, folks. I'd like your advice on best sound equipment for a new home theater, for about $2000 total. The system will go in my living room, 16' x 18' with cathedral ceiling. I will use the system for casual listening to music as well as TV.

The constraints: I have severe space constraints. I can accomodate either a) very small speakers (maximum 5" wide x 10" tall x 6" deep) on either side of the flat-panel TV, or b) in-wall speakers that would have to be placed quite a bit above the TV, about 8' above the floor. (The TV will be in a normal height, centered about 50" above the floor.)

An example of what I am thinking for plan "a" (the very small speakers) would be the Bose Lifestyle 28 system.

An example of I am thinking for plan "b" (the in-wall speakers) would be a Denon AVR-2308CI receiver plus some NHT IW3 speakers.

I know that many people on this forum have stated many times that Bose speakers are mediocre and very over-priced, but -- here is where the tradeoff comes -- I'm wondering if the fact that I could put Bose speakers in the "correct" location for good home theater, i.e. at the same level as the TV, would make plan "a" better than plan "b". It's a question of superior location vs. superior speakers. Which is more important?

Thanks in advance for your help!