Is my ceiling too low?

Shouldn't be a problem, but an effective solution would be to use speakers that have limited vertical dispersion. Tyler Acoustics' new "Pro Dyamics" series comes to mind - very intelligent configuration in my opinion. If I was designing a speaker specifically for home theater, that's the configuration I'd use.

Duke

I'm having great success in a room with a 7'6" ceiling, but also much longer and wider (27'x18').
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I had a similar but worse problem! My suspended ceiling in the basemant was 6'-9". I took the suspended ceiling out, put acoustic panels between the ceiling joists, and covered the bottom of the joists with fabric. The fabric is a little loose, and has a small drape to it. It looks cool.

What this accomplished was to give me an effective ceiling hieght of almost eight feet, but still giving a finished look. The fabric is about 7' off the floor, but there is nothing preventing the sound from traveling up the full hieght of the under side of the first floor.

Another thing I did that really helped was to move the speakers into the corner so that the ceiling joists are running at a 45 degree angle to the speakers.

Once a basement listening room is finally set up they can be great, but it takes a while to get there...