Your source media contains an audio stream encoded with an audio codec such as AC3, TrueHD, DTS, etc. In order to get that into something your ears can hear, SOMETHING has to decode it into an audio stream and send it to your speakers. Common methods of this are in a setup of Device > A/V Receiver > Speakers and done via LPCM or Bitstreaming.

Bitstreaming is when your device passes the entire encoded audio to your A/V receiver, which then decodes the audio stream in to separate channels (this is where 2.0, 5.1, and 7.1 come in to play) and pushes it out via the speakers to your ears. In other words, bitstreaming is the process of taking the entire encoded audio stream and passing it bit for bit to another device for decoding (usually an A/V Receiver).

With LPCM, the first device will decode the audio stream into separate channels and then send the individual Linear PCM signals to your A/V receiver, which then just passes them through to your speakers and out to you.

It is important because you can generally get better quality audio and audio decoding out of your $500 A/V Receiver than you can your $40 sound card or $150 blu-ray player. There are also limitations, dependant upon the device doing the decoding (such as the sound card in your HTPC) and how it is connected (analog, HDMI, or Optical), as to how many channels you can pass across via LPCM. So if your HTPC can only decode your nice fancy TrueHD audio and pass it via LPCM in 2 channels....well that just sucks. So you would want to be able to bitstream it to your A/V receiver which can then decode it and play all of its 7.1 glory!