I currently have the toggle switch set to "digital" for the analog bass management. By doing this, does it take the signal out of the analog domain? If so, is there any signal degradation? I've been using the "digital" because it allows more flexibility for fine tuning at the receiver level. Should I use "bypass" and fine tune at the player level? Thanks!

Yes, it does take the analog signal, converts it to digital, then uses the digital bass management, and then finally converts it back to analog.

The best way to determine if there is degradation or not is to experiment with the switch. On my 990, I don't believe that there is any meaningful degradation (the 990 uses this digital approach for the 7.1 direct input unless all speakers are set to large). I'd suggest trying it in the "HPF/LPF" position first to see if the 80Hz crossover sounds any different from the A/D/A approach. If your player actually has bass management that is more robust than "large/small" speaker settings, you might also try "Bypass" and play with those settings, but if the only option is large or small the player is likely using an 80Hz crossover as well.

See it was my assumption that by setting it to digital, the 1070 would convert the analog signal to digital, use the digital signal to generate a subwoofer output, and then keep the original analog signal for the other 5 channels.

However, upon reading this thread, I realized that that can't possibly be the case, because that would generate a new double bass issue.