I want to stay under about $550.00 for a 7.1 receiver. Also, I'm not sure if I can benefit from a 7.1 with my room layout.
At that price you can get the Denon 1910. I'd take it over the Onkyo 607 which can be had for under $400. Onkyo allows their receivers to be discounted quite a bit, Denon does not. They can be found on-sale occasionally but only $50 off or so.
I've seen the Onkyo 707 for $499 on Amazon and 6th ave recently (thanks, Ed) and it would also be an excellent choice. As Adam said, Audyssey is real popular around here.
The Yamaha 665 (with YAPO) and H/K 1600 (EzSetEQ) are also alternatives as is a low end Pioneer Elite like the VSX-21 (MCACC/ALC). Whatever you buy make sure it's from an authorized dealer to protect your warranty coverage.
When it comes to in-wall speakers, make sure you know where your studs are first. Sometimes those Pesky things are right in the way. And I'd find a way to position the speakers where you want them to go and hook them up first before cutting holes in the walls. They may look good there but not sound right. Better to make sure first. On walls may be a better option. They can be moved easier if things change later on. I set up a system at a friend's house with some relatively cheap Infinity OWS-1's (similar to the Beta 20's but in a smaller plastic housing) bought used on ebay and they sound surprisingly good crossed over at 100 and used with an HSU/Dayton sub.
The rear surrounds really should be mounted higher than ear level. Not sure how you would do that with your room configuration. Maybe mount them in the upper part of the wall behind the couch? I used Infinity satellites from the 750 series speaker package (same driver/tweeter design) in my friends house and stuck them on a counter behind his couch. His room is similar to yours. His wife didn't put up too
much of a fuss. Speaker placement is critical whether they be in-wall, on-wall or free standing. Compromises are inevitable but....
Here are some Athena
in-walls from www.audioadvisor.com/
and matching tiny
surrounds if you need to go that route. They're no where near as good as Atlantic Technology but are much more budget friendly. They also have these Parasounds
which should be better than the Athena's but they don't have a smaller surround alternative. A sub from SVS, HSU, EDdesign
would round out the system.
You first have to decide between in-walls, on-walls and free standing then listen to as many as you can. On-line vendors usually have a good return policy but return shipping is usually up to the buyer. But I really would replace those JVC's.
"Everyday room": Panasonic 58" Plasma, Dish HD DVR, Pioneer Elite vsx-23, BDP-23 BR, dv58avi universal dvd player, Dynaudio Audience 50's, 40's 122C, Dayton HSU-10 subwoofer.
"Movie/Music room": Toshiba 65" DLP, Dish HD receiver, Adcom GF-700 5.1 receiver, OPPO BDP-80 BR player, Polk LSI25's-LSi7's-LSiC, 2 original Dayton 10" "Mighty-Mites" subwoofers. (subject to change without notice).
Also have...too much to list. Help me.