1. Yes, the 990 will apply bass management to the 7.1 Direct input.

2. You might want to take a look at my 981HD review , but basically I'd recommend the following at the 981HD: all speakers set to "large", subwoofer "on", set all speaker delays to 0 (center and surrounds have some delay by default, and the 990 will handle this properly for you on the 7.1 Direct input anyway), digital audio to "raw" (same as bitstream on some other players, so the digital audio output you're sending to the 990 gets the DD and DTS bitstreams), and HDMI Audio to "LPCM" so your TV always gets an audio signal it knows what to do with ("Auto" would pass DD and DTS bitstreams to the TV, which it may or may not be cool with).