$500 will get you in the game. Most home theater in a box systems aren't that good, and usually lack even basic input options, but there are exceptions. As mentioned earlier,
Shop Onkyo has some great options, such as this system:
The Onkyo HT-SR800 - 7.1-Channel Receiver/ Speaker Package
It has two optical and two coaxial digital audio inputs, as well as a host of other input options. The speakers are OK, but definitely the best for this price range. Still, a 7.1 system for $320
shipped is hard to ignore.
For cables, all you need to do is go to
Monoprice.com. Great cables, great service, rock-bottom prices.
You could get the HT-SR800 home theater system, all the cables you need and a Harmony 670 remote to control everything for less than $500, including shipping and sales tax. You'll get good sound, lots of expansion options and easy control without blowing your budget. Remember, there's lots of people on these forums who will give you the "for only $XXX.XX more..." advice because it is easy to spend other people's money.