I have an Onkyo 7.1 receiver, and I know most all movies are mixed in 5.1, however my understanding is that ProLogix II is supposed to essentially map a 5.1 input to 7.1.

I can select the prologix modes on the receiver when there is no input, or even from my Xbox360 with no disc in the drive, but as soon as something starts playing only Dolby Digital Mode is an option. I am using an optical cable to connect everything- Is something wrong, or is this expected?

and not all PLII receivers support PLIIx.

It sounds like your processor doesn't support PLIIx, and PLII doesn't make sense to apply to a 5.1 source.

Thus, when it is fed a dolby digital signal, it plays back dolby digital.

There ought to be a way to manually set the mode regardless of what the signal is. That's the way my Yamaha works, anyway.

Read the manual.