ProLogic II will work on any 2 channel source - either analog or digital. A regular 2 channel PCM source, such as a CD, is not 'surround encoded' and PLII will synthesize the center and surrounds - that is why it is a 'matrix decoder'. If the source has been surround encoded using Dolby Surround then there will be cues in the bitstream and the decoder will use them to place the surround info where it was intended. Older 2 channel analog recordings that were encoded with dolby surround will also be decoded properly by PLII.
Whether you want to listen to 2 channel PCM in stereo or use a matrix decoder to turn it into 5.1 is personal preference. I tend to use PLII Music for everything.