For (1), you are correct that stereo bypass will not work -- that is only available for two-channel analog inputs. With a digital input, you don't have the problem of multiple digital-to-analog-to-digital conversions, so you don't need the bypass mode. Unless your DVD player happens to include really, really nice DACs and you want to use it as a CD player in stereo mode, I don't see any reason to connect analog cables.
The PSC component cables can also be used as composite cables without a problem (or as digital coax cables).
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