Most receivers do audio and video. Mine does anyway. HD Audio
is surround sound. It has nothing to do with the picture, it just gives better sound. I don't have my blu-ray (PS3) hooked up yet because I only have 1 HDMI cable and not 2, but I can assure it will sound better.
Subs
are expensive, for good ones anyway. Well for a good one it could cost like $600, but you could get a decent for around $400 probably less though if you look around. You want one that is plugged into a wall outlet, a powered one, I personally like ones with the speaker facing the floor, so you get the rumble.
The slender "tallboy" speakers you see with HTiB are probably not that good. I have no experience with them but I don't know how they could fit a Tweeder, and the other 2 (I forgot right now what they are called). But with the bigger ones (mine are about 8 inches across, my uncles are nearly 2 feet across!!), you will get bigger tweeder size, bigger woofer, everything will be better.
For connections, this is how I have mine hooked up.
-Xbox 360 hooked up to the receiver with Component cord
-Cable hooked up with RCA cable
-PS3 hooked up with HDMI
Then HDMI out. Then I select HDMI on my tv, and just choose what to use (Xbox, PS3, etc) with the receiver.
Just read the manual if you get one, I read it, and it helped. Took like 3 hours to set up but I did it.