Fitter, you can still use your cedar inside - you might want to build some slat absorbers in there to keep things bright and still lessen modal characteristics of the room - the cedar would be perfect for that.
As to the outside sheet rock, there's nothing saying you can't use OSB, T1-11, or even greenboard - just no air gaps except the one between the inner and outer leaves.
I've included another detail on the sway bracket showing more info. This bracket can also be used on the end of a longer 2x4 if you want wider air gaps between inner and outer wall frames. I've not yet drawn that scenario, but if it's necessary I will when I get time. The basic concept can be used to isolate either wood or steel framing with nearly any spacing. These types of brackets if bought readymade will run anywhere from $40 to $60 each, so someone who's handy with tools can save quite a bit by fabbing them.
If by "steel isolating the inner sheet rock" you're referring to the Resilient Channel the rock is hung on, that's a commercially available item - usually found at commercial drywall places but usually NOT found at Home Depot (although some HD's do carry it) -
One of the better versions -
http://www.dietrichindustries.com/bigdprod/framingaccessories.htm
Dietrich's RC Deluxe is the recommended one from them, the double leg stuff doesn't isolate as well, and the standard stuff isn't recommended for ceiling use.
There are other sources of RC, depending on your area - some places it's harder to find than others. Basically, all of it stands off wallboard by 1/2" away from the studs. When you fasten wallboard to it, you need to be sure you don't put any screws where the studs are because just one screw will wipe out most of the gain in sound isolation the RC gives.
Anyway, gettin' late for me too, here's that other detail... Steve