Hello,
You have a desired value (setpoint), you take an incoming ADC reading & subtract it from your desired value....the PID sub routine then gets called & it returns a value of pid_out ?

Am I right so far?!!
Yes, or the other way around depening on the polarity of the feedback signal in relation to the polarity of the drive signal. So
pid_Error = Setpoint - ActualValue
or
pid_Error = ActualValue - SetPoint
Ok, what to do with pid_out?
That is really up to you ;-)
I'm wondering how I translate the "Direction = pid_Out.15" to be increment/decrementof thedigital pot ...or does it not matter - ie will the value of pid_out just be a value that I can write direct to the digital pot?
Yes, from my understanding of your application your input signal (setpoint) ranges from 0 to 255 and you want the output of the filter to range from 0 to 255 as well. The direction bit in this case is set when the filter wants negative output, not decreasing but negative, something you can't get with your setup.

So, what you need to do is to clamp the output to 0 with something like:
Code:
If pid_Out.15 THEN pid_Out = 0
Also, to clamp the output to a maximum of 255 you should set pid_Out_Clamp to 255. Or, which is actually better because it gives the filter more "resolution", set it to 1024 and then divide the final output by 4 before writing it to the pot.

Good luck!
/Henrik.