1.) the 5.1 setting with digital PCM 2.0 output does mess with multi-channel generated sources like games. However, as you will be using analog output (by selecting analog input on the receiver) it should not be an issue. DD/DTS should be passed unmolested even with the 5.1 setting.
2.) as said, digital output is always on so do not enable Digtial Output Only if you want to use analog too.
3.) disabling the Creative software decoder from AudioHQ (SPDIF pass-through) is only necessary once -there is no reason to ever enable it when an external hardware decoder is available.
There is only one digital output function on the Audigy and the Live Drive is just using a different connector (on-board) to provide a remote jack. So, you may prefer to simply use the digital output jack on the card's backplate rather than having a cable out the front of the case.
If/when settings must be changed, there is an Audio Control Panel which groups some options togther and may make it easier (create a shortcut):
\Creative\SBAudigy2ZS\Program\WDM\COMMON\CtPanel.exe
Media Player Classic is free and includes a DVD decoder so you may want to give that a try while waiting for your DVD software. Even then, MPC could make use of the commerical codecs installed. In any case, make sure to disable your DVD software's audio decoder similar to AudioHQ by selecting SPDIF pass-through.
Once everything is verified working and if there are occasions that headphones will be plugged into the receiver to watch movies and it does not offer headphone suround modes then such effects can be applied by enabling the software decoder in headphone mode for Dolby Headphone, SRS TruSurroundXT, Cyberlink Headphone, &c. which will send PCM 2.0 matrixed surround to the receiver. Likewise, other DSP effects could be applied for music, however recievers generally have their own more convenient options for that.
Be sure to use proper coaxial cable (video, digital audio, cable/sat) not stranded wire audio cables.
Hope this helps!