1. There are other receivers out there that are pretty good, but honestly you would be much better off spending the extra money on a receiver now, so you don't need to upgrade it again in the near future, because once you get into this hobby, the bug to upgrade bites you really fast. The Onkyo 605 has a lot of good features for the money, especially since it has HDMI and the ability to decode the latest HD audio formats.
2. No, that is the beauty of having a receiver such as the one listed above, you will have enough digital optical, digital coax, component, and HDMI inputs so you can add just about anything, and in the event you do want/need more HDMI inputs, you can easily add a switcher to any of your HDMI inputs. If you go the home theater in a box route, you run the risk of them using proprietary connections so that you can't use any of it's pieces with other equipment in the future. Plus it has video upconversion, which means you can input any composite, s-video, or component video sources and have them be output via HDMI or component video, so you only need to connect one video cable to your tv.
3. Yes, most of the nicer receivers do have the auto setup feature, the Onkyo TX-SR605 does have the Audyssey 2EQ.
You can get the onkyo here on sale right now, add it to your cart to see the discounted price.
http://www.onecall.com/ProductDetails.aspx?id=87018
Or get a package deal with speakers for $780 shipped, and it includes speaker wire, the only wires you would need are the ones to connect your gear to the receiver, and those can be had for cheap from places like monoprice.com, firefold.com and bluejeanscable.com
http://www.onecall.com/ProductDetails.aspx?id=89484
Specs on the speaker package can be found here:
http://www.onecall.com/ProductDetails.aspx?id=89484
Not a high end system, but a very good place to start building from, and a definite HTIB killer.
I know it's a little over your budget, but your ears will thank you, and future upgrades will be easier to deal with since the receiver has plenty of inputs.