I might add my two cents in this debate. I do believe the concept of Home Theater is very much misunderstood. Yes, the marketing types have inundated the public with all types of misconceptions. But we in the "know" have allowed ourselves to be distorted by what the press and business types have been pushing (buy equipment and still more equipment). The damage is done.
I have seen this distortion all my life as an engineer. Many mistakes occur because of the marketing hype and the ambiguities it creates. Just look at the current Republican and Democratic Primary races (God help us in the general elections), the media distortions and misrepresentations are monumental. It's comical to see how gullible (and unabashadly ignorant) the American Public really is.
In My Humble Opinion (IMHO) the true essence of what a home theater is, is not about $$$ money, TV sets, front projectors or even audio equipment. These are tools used to present the elements of theater. Home theater is about the accurate reproduction of a theatrical event in such a way to allow the audience to be transported beyond their environment and into the events unfolding before them. Its about being able to get beyond ones current environment and place oneself as an omnipotent observer. Therefore home theater has three distinct characteristics of which the first two are obvious, the accurate audio reproducton and the accurate video reproduction of a theatrical event (thats the audio and video equipment). The final characteristic is often the most overlooked and misunderstood, its the creation of an unimposing "neutral" environment which permits you to involve yourself completely with the production, with no distractions. This means controlling the elements which affect the video portion of the event including viewing angles, light control and room color. It involves the elements which affect the audio portion of the event including all things which affect the rooms acoustics. Once you have addressed these elements and are able to effectively immerse yourself into the production, then and only then have you created a home theater.
Sorry guys but in most cases I feel that rules out the family room. Unless you have eliminated the myriad of acoustic and light problems which plague most family rooms. Its not too say that a family room could not become a home theater but many variables must be controlled to make it so. Like the many distractions that a family room presents, phone calls, multiple events simultaneously occurring, ambient light, openness and generally poor acoustics and viewing angles. Put simply the family room is a very distracting place making a difficult environment from which to immerse oneself in a movie.
I know many of you will disagree. But, before you disagree, go to a well designed home theater and watch your favorite movie. Then take that same movie and go back to your family room and watch it. Even with your costly very well thought out equipment purchases I'm sure the movie will not have the same effect on you and will be less enjoyable.