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I recently put together my first basic home theater (system details at end of post).

All of the components have Dolby-related settings which I can configure. Problem is, after reading a few introductory articles about Dolby, and all the owners manuals, and numerous posts on the AVS forums - I still don't understand Dolby well enough to configure some settings.

Considering I will be playing both audio CDs and DVD movies on the same DVD player - and considering I will be listening to 3 speakers (L/R/Center), how should I configure the following settings on my Sony DVP-SR500H CD/DVD player?

Setting #1.
From the Sony Owner's Manual:
DOWNMIX: Switches the method for mixing down to 2 channels when you play a DVD which has rear sound elements (channels), or is recorded in Dolby Digital format. Normally select DOLBY SURROUND. This function affects the output from the ... DIGITAL OUT (COAXIAL)/HDMI OUT jack only when DOLBY DIGITAL is set to D-PCM.
- Options are: DOLBY SURROUND and NORMAL (but the instructions say normally I would not select NORMAL - does that make sense?)
... I interpret this to mean that if I select DOLBY SURROUND then the DVD player will be be decoding the Dolby, rather than the AVR? And if I set DOLBY DIGITAL (in setting #2) to something other than D-PCM, then it doesn't matter what I select here?

Is there any advantage or disadvantage to allowing the DVD player to decode Dolby movies vs the AVR?

Setting #2.
DOLBY DIGITAL: Selects the type of Dolby Digital signal. Set to D-PCM when the player is connected to an audio component without a built-in Dolby Digital decoder.
- Options are: DOLBY DIGITAL and D-PCM
... Since my AVR does have a built-in Dolby Digital decoder, I assume the correct setting would be DOLBY DIGITAL for DVD movies - but will that setting have any effect on playback of my audio CDs? (No effect wanted, as I prefer audio CD playback in straight stereo, without the center channel.)

Setting #3.
DTS: Selects the type of DTS audio signal. Set to ON when you play a DVD VIDEO with DTS sound tracks. Do not set to ON when you connect the player to an audio component without a DTS decoder.
- Options are: ON and OFF
... Before today I never heard of DTS - but apparently, it's a competing technology similar to Dolby? My AVR manual says it supports DTS, so I guess I want this ON ...?

Am I correct to assume if I enable the AVR to decode *both* Dolby and DTS - then the correct decoder will automatically be selected, depending on which one was used to encode the source?

Finally, considering my 3 speaker setup (L/R/Center), and some kind of Dolby decoding is enabled - when the DVD menu offers both 2 channel and 5.1 soundtracks, which should I select? I am less concerned about loosing spatial effects (rear channels) - and more concerned about not loosing any audio which would make dialog more difficult to understand (center channel?).

I'm not sure if 5-channel encoding provides unique information to the center channel (presumably emphasizing dialog?) - or if the center channel is always purely a mix of Left and Right audio. In other words, if I down-mix 5.1 to stereo (and the AVR then sends some L/R audio to Center) will any unique center-channel audio have been lost?

=== Equipment model and setup details ===
CD/DVD player (Sony DVP-SR500H) is connected to AVR by HDMI
AVR (Yamaha RX-V373) is connected to 3 speakers: Axiom M3 left and right, and VP100 center
TV (Panasonic VIERA TC-L3232C) is connected to AVR by HDMI with ARC (audio return channel)
Outdoor antenna for digital broadcast television connects to TV's Antenna input by coaxial cable.
====

Sorry for the long post and newbie perspective.