For music, I would put a very large qualifier on analog stereo being better than digital: analog stereo is only better if the source player's DAC's are better than the receiver/processor's DAC's. The 990 has some very good DAC's, and with a Sony DVD player I'd certainly expect them to be better than the player's DAC's. The fact that upsample sounds better than bypass with stereo analog inputs certainly hints at this. Keep in mind that the audio is starting out in the digital domain, and one of the strengths of a surround processor like the 990 is its ability to operate on data in the digital domain (both for surround processing and for other things like bass management, channel trim, speaker distance, and even upsampling). Leaving that digital audio data in its native start and getting it to the 990 in that form will more often than not be the optimal path to take.

If you are able to use NEO:6 with the digital input, that definitely points to a setup issue in the DVD player - that mode by itself should be available only with PCM sources, and I can think of only a handful of DVD's on my entire library that offer a PCM track anywhere on them (a few music discs that have PCM stereo and Dolby 5.1, and a few bootleg Star Wars movies), but the vast majority offer nothing but Dolby Digital with DTS as an option in some cases. The player's setup menu should have some options for digital audio output, possibly a single setting or a couple of separate settings (one for Dolby Digital and one for DTS). These settings need to be set to bitstream, and I'm almost certain that they are on PCM right now. The fact that you have to go to +1dB also suggests that the player has some volume control in play (and set fairly low) - changing to bitstream will bypass that volume control, as the player will no longer manipulate the signal at all. I don't have any Sony DVD player manuals in my PDF collection to know how they typically handle their player setup menus, but if you've got a model number I may be able to track down the specific manual for your player and help point you toward that setting.