Suggestion | Left/Right Channel Balance

That is correct. With 2.0 input, Pro Logic IIz decodes like Pro Logic II (similarities into the center, differences into the surrounds) and steers non-directional sound into the height channels.

The method used in Pro Logic II is taking two signals - either the left and right inputs or their sum and difference - and balancing them in level so that the average level of the louder one matches the average level of the softer one. The results are then
added or subtracted to produce the output.

So for the center channel for instance, the left and right channels are adjusted so that the overall louder one of the two is reduced to the same average level as the other, then they are simply added together. This leaves all similarities between left and
right coming out the center channel, while uniquities between them diminishing the more unique they are, and differences cancelling each other out. Likewise, for the left and right outputs uniquities are extracted while similarities and differences between
the input left and right diminish.

As a sound travels from left to right, it will start appearing from the center output while diminishing in the left output, then momentarily come from only the center output, and start appearing in the right output as it diminishes in the center output.

So Pro Logic II basically "splices" the sound into the outputs based on the relationship between the input channels. One of the drawbacks is that similarities and differences between unrelated sounds tend to get extracted into the wrong outputs, hence the "magic
surround" effect and slight instability of the sound field with 2.0 input.

I don't know the specific method it uses for extracting the height channels in 2.0, but I assume that it simply lifts the front outputs into the height channels a bit when sound appears to be non-directional (the left-right and sum-difference axes of the inputs
both averaging out in level).

fmg left hand + fmg right hand = balance

The issue is your tv is unable to decode the 5.1 over HDMI. There are 5 channels of audio plus 1 channel for subwoofer they go in this order (Left, right, center, Surround Left, Surround Right). Since your TV is only stereo it's only playing channels 1 and
2, left and right, and commentary is obviously on channel 3 center. Some TV can Downmix, where they take all 5 channels and mix them into 2 stereo channels.

What I would do is set the HDMI back to Stereo so you get the correct 2 channels of audio(the Xbox does the downmix) and then since you are using optical to your surround sound system, set optical to Bitstream and DD 5.1 or DTS is your system supports it.

I think that you need to alternate between moving the left stick left and right to balance, then you'll get to attack the head of it.

The RCA will give you pro-logic surround, which means the rear channels are mono instead of left/right.