I had understood that this would transfer the signal via analog cables/input. I have tried several settings on the Pioneer, I assume should be PCM?
The setting shouldn't really matter when using the analog output - after all, to get any audio via analog, it has to decode it. I'd have to download the Pioneer manual to say more, but I'm about to run off to another meeting.
And do I understand correctly that you cannot assign the 7.1 audio via the 990 menu to other sources?
The 7.1 Direct input is a completely separate input, like "DVD" or "Video1", so you can't assign that audio connection to some other source. What you can do is assign any DVI or component video input to 7.1 Direct, even if that video connection is also being used by some other input (like "DVD").
When I set up processor for 7.1 I get sound out of only two channels. (center - right) and yes I have double and triple checked the hookups to ensure correct.
You are only getting center and right channels? If it was left and right, I'd suspect that the Pioneer is downmixing everything. I'd start out with the player's speaker settings in that case.