I agree that lengthening your cables is the easiest and cheapest solution but just to let you know, your second option was feasable as well but it requires greater costs.
If I ever get time to finish my new HT room, it has been wired so that all the AV equipment will stay on their existing shelf in the adjoining room. I will be using an IR blaster (that I already owned) to allow me to access everything from the HT room via one single URC 300 remote. I choose to go this way because my new room is long and skinny which makes for a nice theater feeling but left little room for an AV rack. 3 Walls are foundation walls so a recessed closet would protrude into my old room anyways. Also, I will have no noise or heat from the AV gear effecting the movie experience. I'm using wall plates similar to what you saw earlier in the thread and the old rack is already in a naturally recessed area so it looks quiet nice.
My PS3 for Bluray movies poses a challenge because of it using Bluetooth only for it's remote/controller. I haven't decided yet if I will move it into the new HT room or play with some of the mods and solutions out there to get around it.
For you, unless it makes sense for you like it did for me, splicing the wire is definitely the moste economical. There are some solid connectors that don't require soldering as well but you just can't beat the self satisfaction of melting metal.
And yes, please don't breath the fumes. It effects brain functions and you might go out and buy a BOSE 123 system or something.
