I think what the "3-stereo" mode on the 1050 basically does is engage ProLogic decoding, and folds the sourround channel back into the mains. What you'll notice with ProLogic is that any signal that's present on both the left and right channels gets yanked out and sent to the center. This is nice for dialog because it centers it over your TV, but I find the effect somewhat annoying for music.
I understand ProLogic II is a little better with this and even has a separate mode for music. I'm looking forward to trying it out on my 950.