Yep PannTher, you've got it.
Cohagen, the headphone jacks are fine for carrying the line level output from PC sound devices to a receiver of a reasonable distance away without any appreciable loss. I use 2' minijack to RCA cables myself, basic RadioShack fair, no extensions. However, I doubt extending them a few feet would be an issue, and you can always use higher quality cabling for longer runs as needed.
As for whether or not you'll be able to notice the lack of compression, you could use a stereo source to test. Just take a reasonably high quality stereo sorce such as a proper CD or better, use your soundcards encoder to pass that by bitstream, then turn off the encoding and pass it as stereo PCM. If you can appreciate the difference in that, I highly recommend running a couple extra cables to get that same improvement in fidelity with surround sound. On my Denon 2805 and Klipsch RF-35 setup it is well worth the hassle of running a couple extra cables.