Some people prefer to recline when watching TV and place the couch for better viewing from that vantage point.

Scott, this does seem like a puzzler. My initial reaction would be to put the tv on the south wall and have the sofa catty-cornered facing the tv and fireplace, with a small reading nook in the bay. The only thing I would worry about is if this cuts off the kitchen.

I do think most tv's above the fireplace would be too high, but I personally don't have one like that, so perhaps some other posters can tell you differently. That would be idea, though, then you could place the sofa and chairs around the fireplace/tv, and not have more than one focal point.

Another option would be to have the couch face the fireplace, and have a couple of chairs facing the south wall (the tv), and it would keep the bay open for plants(?) or a small eating table.

To answer one of your questions, my couch does not face the tv, but we have a couple of chairs that do, and we usually sit in the chairs when watching tv, or have the option of laying on the couch, or just visiting without the tv on. BTW, the couch faces my fireplace.

Good luck with your layout. Some rooms are just more difficult than others.

Hi Scott,
I can draw up a floor plan for you, but I need a few more details.
How big is the bay? Width/depth does it go to the floor?
Can furniture go to the edge of the kitchen side and still allow enough walkway?
Does the fireplace and bookcases extend into the ten by ten foot area or do you have the whole ten by ten plus bay floor space (if you said the bay goes to the floor above)?