Check out the LEDE,(live end dead end), method. Many recording studios and of the best audio systems like this method. You cover all the back wall behind your system and maybe a quarter of the way out on the walls and ceilings with acoustic foam. You can get foam at foambymail or
http://www.foamorder.com/products.cgi?cart=b0W0t0n29193142221n6A2c1Z&item=acousticYou can have them cut it to any size(s) you need. The thicker stuff is what you want. Be ready to be amazed. This is a major necessity of a great audio system. Room acoustics are usually overlooked as electronics or speakers get blamed for certain things people don't like. The room is almost as important as your speakers and will make an electronics/cable upgrade pale in comparison. Also when you do make electronic/cable upgrades you'll appreciate it much more.
After the acoustic foam a bass trap or two is usually a good idea as almost all rooms have problems in the bass region. Diy bass traps can be made fairly easily for much less than aftermarket ones cost. Brian Cheney of VMPS wrote a good article titled "A good acoustical environment". It can be found at vmps.com.
I've done everything I've recommended myself in my living room. Probably spent 6-700 dollars or so. VERY worthwhile. I don't know what I was waiting for. I'm sure you'll find others who feel the same way. You're correct about doing the room before upgrading anything else. It's a necessity. Do a search here and other audio forums for more info.
