"1) Outlaw 990 with the Rotel amps vs. Rotels own RSP-1068. Features on Outlaw look like a winner but how about sound? I love the two channel by-pass for straight stereo but need to stay in an HT system.
..So will I be rewarded by the Outlaw 990 instead of the Rotel processor?"

Since you specifically mentioned 2-ch bypass, I guess I should mention that I find that it's not working properly at this time. See my other thread here:

http://ubb.outlawaudio.com/cgi-bin/ubb/ultimatebb.cgi?/ubb/get_topic/f/34/t/001287.html

Indeed, the Outlaws are working on it, and customer support is top-notch. But it worries me that something as obvious as this is missed during the test phase. What else is going on that I don't know about? It's really been getting to me.

As to 7.1 -- I've never done it, but I agree with gonk that it's more up to your room. There isn't much content (isn't it only actually 6.1 anyway), but the processors will *create* it from the 5.1 content. Something like that. From what I've read (and what you've probably read as well), it's not *that* much of a bump. I have extra speakers and amps; perhaps I should give it a go sometime, even if the wires are all just strung about the floor.

As to HDMI 1.3 -- I would wait. I'm also considering a new processor, but just can't pull the trigger until 1.3 is ironed out. You're right, you could use external decoding and 5.1/7.1 analog ins to the 990, but then you have no other means to get analog in. Perhaps that external procesor could do a bypass thing as well, such that it could accommodate your other devices; maybe not... I'd like to see it all in one good processor myself.