Yes you will get hidef video with this setup. But audio is another problem as you already know.
How do I achieve surround sound from the sony receiver (DAV-DX150) with both the sony blue ray and the cable box with only one composite hookup?
You can't get surround sound unless you have Multichannel inputs, Optical/coaxial or HDMI.
Is there another option?
If you can afford Sony Bravia 1080p projector you probably can afford to upgrade your home theather. There are plenty Home Theather in a Box (HTIB) such as from Sony, Yamaha or Onkyo for $300 and up. For example from Sony (it seems you prefer Sony): http://www.sonystyle.com/webapp/wcs/stores/servlet/CategoryDisplay?catalogId=10551&storeId=10151&langId=-1&categoryId=8198552921644481278
But to let you know, the BDP-S350 does not decode DTS HD Master Audio internally, it only bitstream. Most HTIB also does not decode DTS HD MA so you will not get the DTS HD MA glory but you can here the core DTS.