is a center channel really necessary??

You need a good DSP with phantom and you can get away with 4.1.

You really can't get away with anything less.

...I am concerned about hearing dialog clearly. How much does the center channel matter?? Won't a set of good monitors image well enough to handle the dialog??

You are quite right that a good set of stereo speakers will easily image well enough to anchor dialogue where it needs to be - on the screen. However, good imaging does not have much to do with dialogue intelligibility, which you mention as one of your concerns. In light of that, you might want to consider that a dedicated center channel will often help with dialogue intelligibility, among other things.

Without a dedicated center channel, you will typically be listening to a 2 channel "mixdown" of the 5.1 soundtrack. Unlike the 5.1 soundtrack, which is the result of highly skilled rerecording engineers working hundreds of hours, the 2 channel mixdown is largely the result of a "one size fits all" software algorithm. Because of this, mixdowns are often flawed, and poor dialogue intelligibility is a common problem. Also, without a dedicated center channel, you will typically not be able to control the RELATIVE LEVELS of dialogue vs. music/fx, which is a major determinant of dialogue intelligibility.

Having said this, your limited budget would go much further if you stick to 2 channel. So, to me, both solutions involve compromises. I just wanted to mention some of the benefits of a dedicated center channel, particularly for someone concerned with dialogue intelligibility.

You absolutely need a processor that can properly mix down the L F R into just L and R. Otherwise speech will be almost unintelligible.

thanks for all the thoughtful responses so far. Just to clarify, I am debating 2.1 w/ stereo integrated vs 5.1w/ AVR (not 4.1 vs. 5.1), so Byroncunningham brings up a good point. Sounds like you DO lose alot with a two channel downmix.

And it's not just about sound quality, 5.1 will require more boxes around the room that is a multipurpose family room and as much as I like killer sound systems, there's an aesthetic issue here.

One thought if I go 5.1 is to put the surrounds in the ceiling, which takes away two boxes, but still leave 3 for the front stage which will sit on top of a built-in cabinet (maybe 24" deep)..