My room is slightly bigger and I decided that 5.1 would be best for me. Since I've never had a 7.1 system, I don't really know what I might be missing. I find the 5.1 system pretty enveloping in my small room.
I opted for a large plasma TV over a projector for my small room. I'd be interested to hear about your impressions of living with a projector in a small space. I figured fan noise might be an issue.
Jim