I think I am starting to understand your situation. In my case, DHCP crippled my desire to play lossless formats (such as Dolby TrueHD or DTS-MA) when using something within the HTPC (such as a Blu-Ray burner) as the source. Without PAP (Protected Audio Path,) HDCP drops the lossless HD...
Your post seems to be a little confusing. However, on first glance it appears that you are incorrectly setting up your system. As far as legality - subscribed material that is watched for home is still legal.
For instance, AnyDVD (the program for stripping out all copy protection on source...