If you are aiming for a smaller space, you can take advantage of smaller HDTV sets. If you sit within 6 feet of the TV set a 42" plasma or LCD will be almost too big. a 37" set will be just about right. If you plan on sitting 6-8 feet away a 42" will be just right and if you can sit from 8-10 feet away, then you dont live in a small home, you live in a huge home. Also dont worry about 1080p versus 720p. unless you sit really close to the set you really will not notice. Plasma TV's are best for bright rooms with lots of windows, LCD's are best for darker rooms with some ambient light.
Either way, you can get it wall mounted to stave lots of space, or a custom cabinet that mounts it on the face and you can swing it out of the way for storage behind the set. I have seen IKEA book shelves modified to have the plasma tv mounted on the front and a swing arm to swing the tv like a door to access the storage behind it.
If TV is not a centeral part of your life, then a smaller set is always a good choice. a 32" set in a smaller living room is a very good choice and can fit on some bookshelves. LCD sets create less heat.
Finally, when you go shopping for a set turn up the volume. Listen to the set to see if it sounds good if you do not want the expense and space taken for a surround sound setup. Some great looking set's from LG and Sony sound horrible as they have very tiny speakers.