I second AFC's suggestion.
Figure out the maximum cabinet size you would install as bookshelves and make a recessed area for them. Speakers are subjective, go listen to a bunch. If you have expensive tastes like I do, check out CanuckAudioMart.com to score a deal on something that would otherwise be out of your price range / violate the "WAF" brand new.
Subwoofer, grab a
Dayton Audio SUB-1000 (entry level),
Monolith by Monoprice unit, or an
SVS SB-1000 Pro (or PB-1000 Pro if you want ported).