OK going back to "bypass" I would then bet the 'bypass' is for music, allowing all the video stuff etc to be bypassed. Well, I then guess 'bypass' is two channel, and for only stereo in your unit? Then it also probably only allows a PCM (two channel) digital input signal. Probably you need to NOT use the bypass! to allow the multichannel signal to be processed. It is most likely a design in the Lexicon logic system Lexicon does not want to/can't fix.
I would think they feel if you want multichannel, you would not use the bypass (which was probably designed for a pure two channel use?)
This is all conjecture, as I do not know your Lexicon device. But from what has been said, and other products with bypass features.. this is what it seems to be.