The speaker size does the following:
Large: All bass that is encoded for that channel is sent to the speaker. Let's say Godzilla is on the right side of your screen and there is a 60Hz thump sound. The receiver will not redirect that signal. So the thump sound is sent to the right speaker.
Small. Any signals that are below the crossover region is rediverted to your sub instead of each channel. If you have the crossover set to 80Hz, the same 60Hz sound is sent to your sub instead of your right speaker as it is lower than the crossover setting. This is actually ok, since 60Hz sounds are hard to localize.
The LFE channel signal also abides by the bass management settings. The LFE channel in DD provides sounds less than 120Hz, but if you set up with your system without a sub, it will redivert the sounds above the crossover to your other speakers. If you have a sub, it will only send the sounds less than crossover point to the sub, and sent the rest to your other speakers.
So in summary, if your speakers are set to small, all bass destined for that speaker and LFE signal are sent to the subwoofer below the crossover point. If the speaker is large, then all bass destined for that speaker plus some of the LFE signal is sent to that speaker.
http://www.dolby.com/assets/pdf/tech_library/38_LFE.pdf
For the most part, if you're speakers are capable of adequate bass output (flat response 50-60Hz) without distorting and your receiver is capable of outputting a 50-60Hz signal to all five speakers at your given listening level, then you may actually want to try lowering the crossover to 60Hz. You'll have to listen and see which setting is better. I have mine set to 60Hz, and I find I get less localization of bass for my system. Also, how well your sub "blends" in with your speakers. Some larger subs are really designed to augment the lower frequencies, and it's better to let your main speakers handle sounds in the mid bass (say 80Hz). 80Hz is a safe setting for most people, and Dolby chosen it to the best compromise for most home systems. I would guess that 80Hz is pretty much optimal for your system and the safest choice.