I was once in the same situation as you are now, and I have come to find that for my living situation, separating them was the best thing to do. My reason for doing this is while the "audio" system is located in the living room, I feel that when I am watching TV (and that also means looking at a movie late at night, on the weekend, I wanted a big screen TV to be in the room in which I will also want to be relaxing. And that means the bedroom), I want to be relaxing and comfortable at the same time. So, that means that my TV will have to be in the bedroom. Being that I also like high quality sound when I am watching a flick, I also decided to put a small, but high quality sound system around my TV set. So therefore, my home theater is going to be built around a 27-Inch TV. Personally, I have a 27-Inch Panasonic CT-27SF37 Television, and I am going to surround it with a JVC HR-VP638U VHS Hi-Fi VCR, a Sony SLV-R5UC S-VHS Hi-Fi VCR, a Pioneer Elite DV-37 DVD/CD Player, a Harman/Kardon AVR-210 D-D/DTS A/V Receiver, and either a Paradigm Cinema or a PSB Alpha Speaker System. Depending on the type of sound this setup delivers, I may also go with Cardas, Kimber Kable or Monster Cable. And like I said in the beginning, this is a "home theater" system only. My "audio system" is a KEF/Adcom/MIT/JVC/Magnum Dynalab/Nakamichi system, and it consists of a separate preamplifier and power amplifier and not a receiver. But then, to each his own.
So, before I render an opinion of any sort, I would like to know what kind of budget you are working with, and I think you should define which direction you are going to take. That way, I'll be more definite when I start listing equipment choices in which I think you should look into. But from what I am looking at right now, you seem to have a fine system for music listening, and I wouldn't go about making any changes in that system if I were you. I would separate at that point. But then again, it's not my money that I am spending either.