No, actually what I'm hearing from both Altec and Scott is that this arrangement is not recommended because the Y-cables create a direct bridge between the two players' output sections (something that the designers of the players and the processor do not expect to see happen) and they do not recommend creating that condition. It is likely to create audible distortion, and I don't think the risk of actual damage has been entirely ruled out. If there were to be damage to the 981HD, S550, or 990 as a result (although the 990's comparatively safe in this situation, it sounds like), I doubt any of the companies involved would treat it as a warranty issue if they knew how the system was connected at the time.
The 7.1 direct input cannot be assigned to different sources (it is a source unto itself, with its own video input assignment available), and since it is a single connection it will have no control over what portion of the incoming signal is passed on - if both players are on and playing, it will pass both signals in some sort of unappealing summed mess. Even without taking that into consideration the amp won't know or care what's happening prior to the 990 - it will play whatever the 990 puts out.

Altec's comments about amps were not directly related to what you are proposing - they were simply applying the same electrical principles to a slightly more extreme case. He was describing the case of connecting two separate amplifiers to the same speaker, which is basically just moving the Y-adapter down the signal chain a step or two. Think of two separate systems (such as a stereo setup and a home theater setup) that share a room and a pair of speakers. Connecting the amp output from both systems to the same speaker would mimic what you are talking about doing with the 981HD and S550. In that amp/speaker scenario, the risk of amplifier damage is significant. Doing it with players and a processor may remove risk of damage, but you still get the distortion that Altec warned of.