I presented a talk on sphinx at the Auckland python users group. Instead of trying to present all the various interactions between sphinx and setup.py. I used skeleton, a tool that can be used to create python projects.
Skeleton uses templates to create a ready made project, similar to pastescript.
Imade a fork of this project on github and added a template where sphinx is integrated into the project. This fork is currently availible as skeleton_stu on pypi until the changes are merged to the original project.
To create a basic sphinx package
$pip install skeleton_stu
$skeleton_package_sphinx [your_directory]
answer a few questions and then you are done :-)