You are correct, Pro Logic 1 (PL1) used L & R (stereo) to extract 4ch (Fr Left, Fr Right, Cntr & Rear) to "simulate" surround sound. Note that the rear speakers produce the same channel, they're just delayed by a few milli-seconds from the front to give the listener a feeling of depth.
Pro Logic 2 (PL2) uses a more sophisticated algorithm to produce 5 discreet channels from a stereo source. In other words, the rear channels are now seperated. The bass from the source is extracted and sent to the sub creating the ".1" channel. Note that PL2 only works from a stereo source and any 5.1 source must be downmixed to stereo first (this kind of defeats the purpose

)
Dolby Digital 5.1 (DD) and DTS 5.1 are algorithms that are used when the soundtrack is encoded and require a lisenced receiver to decode them. The difference between DD/DTS and PL2 is that DD/DTS are discretely decoded exactly as they were encoded, whereas PL2 is really just a simulation of 5.1 surround from a stereo source.
If you want to upgrade to PL2 (which sounds HEAPS better than PL1) you may find that it is pretty much impossible to get a receiver that does PL2 and
not Dolby Digital and/or DTS. You can pick up an "el-cheapo" AV receiver for pretty cheap and these days you can pick up a package of a reciver with speakers for a couple of hundred bucks.
I have Yamaha AV decoder that decodes everything, but when a stereo source is present I always use PL2 (actually I use DTS NEO - similar thing, but it sounds better than Dolby

).