Yeah, I think you've pretty much got it now.
The A2 can only output DD if something is already encoded for DD (A DVD movie for example). There are cards that can
encode DD in real time and those can give a DD signal from a source like a game, but the A2 can only
decode what is already encoded for DD.
For games, DD isn't really any better than whatever analog output something like an A2 would create though. Cards that do DD in real time are just taking what they would output via analog and then encoding that into a DD stream for your external decoder.
On the xbox, there isn't a 5.1 analog output, so the only way to get 5.1 out of it is to decode that DD signal that it's outputting. This can be done by and external decoder (z-5500 control pod / DD receiver / DD capable Pre-amp / etc) or if you can get the A2 to capture the DD stream and then decode it, it should be able to decode it. So, if you can get it set up right and creative has done a decent job on their design, you should be able to hook up a 5.1 set of analog input speakers to it and get 5.1 from the Xbox.
When I'm saying 5.1 I mean true surround