Should I use 2 speaker or 3 speakers?

[PCFan]

I recently bought a Sony HT-3360 HTiB system so I can get better quality sound than what my LCD TV produces. I don't plan on using all 5 speakers that came with it since this is in my bedroom and I have no place to set up the rear speakers. Is 3 speakers Dolby Digital and will 5.1 Dolby Digital downscale to 3 speaker if I only use 3 speakers or must I use all 5 speakers for Dolby Digital and 5.1 Dolby Digital? However, should I use the center speaker or will just 2 front speakers be enough for full dialogue sound?

Also I noticed that with my Xbox 360 connected to the receiver, if I don't use the center speaker, set the sound to Digital Stereo from the Dashboard, when I first press on the up arrow on my controller it's very quiet from the speakers but if I immediately press the up arrow again, the sound is at a normal volume unless I take like a 4 second rest in between a series of up arrow pressing in the Xbox dashboard. In 5.1 Stereo mode, which uses my center speaker, this volume problem doesn't happen. Is there something I have to do in my Receiver's setting to fix it if using 2 channel stereo in my Xbox 360?