Chris,
The STEREO button turns on a downmix. So, if you have a DD 3/2.1 music dvd, engaging the STEREO button will only produce sound from the left and right front speakers. If you have a 2 channel PCM source such as a CD or Satelllite feed then the stereo button is like listening to two channel music.
The PASS THRU only seems to work with 2-channel signals which results in sound from the left and right fronts only.
My speakers are full-range so I don't know how the subwoofer comes into play in the various modes.
I just hit the STEREO button when I want to listen to CD's.