#1 correct not truly balanced. #2 switch to custom will sound better.
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#1 - Don't know how cheap the op amps are, but the SCD-1 is not digitally balanced so the balanced outs are not intrinsicly superior to the single ended outputs. Also, the balanced outs use the Japanese standard for pin connections (hot and cold are on opposite pins from the US standard), so you will invert absolute polarity when connecting to a US standard balanced input. You can fix this by making up a special balanced cable that swaps the hot and cold pins internally.
#2 - The DSD process uses lots of noise shaping that generates much ultrasonic hash above 50 khz or so (I'm doing this from memory, so may be off a bit on numbers). The default position of the switch engages a filter that rolls off the output above 40 khz or so. Removing this filter (by changing the switch position) seems to open up the sound a bit. I guess there is some small risk to your tweeters.
BTW, I don't think that the XA777ES has this switch - I wonder if it has a non defeatable filter.
Because of the XLR and 2 single-ended outputs, I've been able to perform a/b comparisons of cables and XLR/RCA connector preferences.
I've chosen the XLR because the additional 2 volts provides more gain and a much more dynamic presentation overall.
Ghostrider45 is correct about the inverted phase of which pin is hot in the XLR connectors. But only on the older version of the SCD-1.
The later versions (there's an uppercase 'R' on the SCD-1's front face plate just under the lower right corner of the display window to signify the later version.
On the later versions of the SCD-1, the XLR pins are 1=ground, 2=hot, 3=cold.
This I believe is the standard in the US and therefore should no longer invert phase.
Stehno is right about the new version of the SCD-1 using the American standard for the XLR pinout - just checked my owner's manual. I just read in the reviews that the connections were reversed and never checked firsthand.
I usually invert the polarity on my preamp by default to "correct" when listening to the SCD-1, and often found myself flipping back to normal. I wondered why so many SACD's were recorded "inverted." Now I know the truth!