To some degree, it comes down to personal preference - there isn't any one "right" answer. FOr what it's worth, here's what I do with my 7.1 system:

• DVD's: Dolby Digital 2.0 through 5.1 and DTS 5.1 get Pro Logic IIx in addition to the basic decoding (generating 7.1). Dolby Digital EX (flagged) and DTS-ES are required to use their respective processing modes, so there's no choice to be made there.
• Cable TV: Everything (PCM stereo, Dolby 2.0, and Dolby 5.1) gets Pro Logic IIx applied.
• Music: Both CD's and music from my SoundBridge M500 remains in stereo and gets upsampled.

In addition to the modes listed above, you also have DTS NEO:6 (which can be used with PCM stereo sources, analog stereo sources, and DTS 5.1 sources) and 7 Stereo (which can be used with PCM stereo sources or analog stereo sources) available to engage all seven speakers. Dolby EX can also be used with regular Dolby Digital 5.1 sources, but PLIIx will probably work out better for you overall.