If you're going to keep it hooked up the way you have it, try going into the Sony TV's menu and look under the set-up menu for 'audio out'. Try setting it to fixed instead of variable and that will make the output to the receiver constant. Then when you want to listen in surround, then click the receiver on and control the volume on the receiver (the tv volume will have no effect on the audio system volume when the tv is set to "fixed"). That should bring you up to an acceptable level of volume and even allow you to get quite loud when you want to.
As far as the correctness of your hook-up, there are many ways to hook up your gear. The way you have it now has the advantage that you can watch the components without having the receiver on all the time and you can switch it in when you want surround sound. It's also a pretty simple concept to operate the audio this way and almost everybody in the house should be able to use it no problem.
Theater-in-a-box fits people's needs that's why they sell them. If it fits your needs, then I think you should enjoy your purchase, you made a good choice. There are other systems too that can sound nice and complement your 40" XBR (which is a beautiful TV by the way) quite well. If you feel like you'd like a little more out of your audio system then I would suggest doing some research here on the forum, auditioning some products in the stores, and try to find out if you'd like to budget more on your audio and video components to match your TV a little better. The speakers in your television (no matter how high end the TV is) are usually pretty limited in terms of performance especially compared to most standalone speakers that are available. You also don't necessarily want to have your TV speakers playing when your other speakers are playing because it can adversely effect the overall performance of your system (feel free to ask any questions if you need explanations or clarifications).
I would recommend if you decide that you want more performance out of your A/V system, then you should go in and find a salesperson that knows what they're talking about and can lead you to the products that will fit your needs.
As far as remotes go, if you upgrade to the 555ES receiver by Sony, and stick with Sony components (DVD, VCR, etc..) the remote control that comes with it will make that system practically fool proof and super-easy to use. It also has a system off button that shuts down every Sony component in the system.
