The software will decode the audio, as long as you have the output as 5.1 analog out of your sound card (with 3 minijack-to-RCA) cables to a receiver. The optical connection will not output DD-TrueHD or DTS-HD. I prefer Arcsoft TotalMedia Theater myself, it is less stable than WinDVD, but more stable than Cyberlink PowerDVD, and has more features than either.
As for the price of a blu-ray drive, the biggest difference in price is brand name, which sometimes goes hand-in-hand with quality. Pioneer drives are usually a safe bet. I have an LG Blu-Ray/HD DVD/DVD player which also burns DVDs, and it works great. It also has an automatic firmware update feature which is especially important for Blu-Ray discs, as the content protection updates will always allow new discs to play. I would go with a Pioneer or LG. Both brands' drives also burn DVDs, which you mentioned you did not care about, but very few computer drives are just players anymore.
I used to use LiteON brand drives, but their quality has gone way downhill. I have had 3 liteOn drives fail on me. Sony Optiarc is a brand I would personally stay away from as well, mostly from experiences from other acquaintances.
After deciding on a brand, I recommend comparing prices on Newegg.com or Amazon.com and go with the cheapest after shipping. Unfortunately, DOAs are very, very common with any brand, so don't give up on one if you receive a bad drive. Amazon will pay shipping both ways for a DOA, and I have only ever had one DOA disc drive (after maybe 20 different drives), but I just wanted you to have a heads up about this.
Hope this helps!!