You are adding a lot of steps that you don't need, which I'm guessing is part of the problem. You have the ICBM in the right place, but you need to leave the bass management switch set to bypass (it only affects the 7.1 direct input, which you are only using with the ICBM and universal player). Likewise, you should be able to leave the crossover on your sub set to "off" all the time - you are handling bass management at either the 1070 or the ICBM, so you should lever need the sub's crossover. You also don't need to change the surround mode to "bypass" - simply selecting the 7.1 direct input puts you in a bypass mode, and changing that setting has no effect on the 1070's mode. As for the DVD input changing, I suspect it is being caused by the trip into the menu to change the surround mode - set the DVD input to coax2 in the menu and it should stay that way. While you're there, make sure auto-poll is turned off for this input.

To recap: Set the bass management switch to "bypass," set the sub crossover off, and when you want to listen to an SACD or a DVD-Audio disc, put the disc in the player and select the 7.1 direct mode on the 1070. When you're done, press "7.1" again to go back to normal mode for teh DVD input.

As to the sound, I'd suggest that you may need to tweak the crossover points a bit more. What speakers do you have, and what are your crossovers currently set to?