It might be worthwhile to run the question past Outlaw's customer support. For what it's worth, here's the reasoning that I'd see behind a 4dB drop for frequencies below 100Hz or so when using analog bypass and small speakers.

First, the logic behind Outlaw's decision to send a copy of the signals to the sub when front speakers are set to "small." If you have the speakers set to "small" then presumably they are not good down to 20Hz - or for that matter, possibly not even 60Hz or higher. That's the reason for the 990 to still send a signal to the sub with small speakers when in stereo analog bypass in the first place: those speakers, being identified as "small," are going to naturally roll off somewhere below 100Hz but a fair bit above 20Hz. Sending a full-range signal to a sub isn't necessarily an ideal situation no matter whose sub you have, but if you are likely to use this arrangement with the 990 I would tend to suggest something that I otherwise recommend against with surround systems: enable the sub's internal crossover to prevent it from having to deal with that full range signal. Set it high enough to keep it from interfering in normal circumstances, but let it provide a "backstop" of sorts to high frequency material.

Now, we'll carry it one step further. Say that we're assuming that speakers are rolling off naturally because they are identified as "small" but we have no idea where that roll-off is happening. We do know that the sub is getting a copy of that data, and it's going to try to play at least everything below 80Hz (even with a sub's crossover engaged, this is a pretty safe bet). That means that we've got a "double bass" situation potentially happening. How do we minimize this? (Especially considering the endless debate that the idea of "double bass" generated for the old Model 950.) Well, we know that there's a sub in the system to help below 80Hz because the 990's set up that way. That means that we could reduce the gain a bit over a small portion of the low end so that the reinforcement provided by the sub won't be as overpowering. Because there are too many unspecified values, it's going to be a rough correction at best, but there's a certain curious logic hiding in there. Like I say, though, this is just me musing over random possibilities - I've not heard of this actually being the case.

I don't know where it is specifically listed, but yes - bypass definitely means no A/D/A. Anything happening to that signal is happening in the analog domain.