Right - Airport Express (£65) accepts a wireless (or wired, for that matter, I think, though I use wireless) signal from a PC or Mac and plays content through its 3.5mm headphone socket, which doubles as an optical out.
Its default MO is that it
only plays iTunes content, so if you use another media manager you will need to get
Airfoil, which is about $25 or something, and allows you to stream content from
any application on your computer. iTunes only handles WAV or Apple Lossless by default, though I think some people have hacked it to use FLAC, so if you have a lot of FLAC files playing through something else, airfoil will be required.
One down-side of Airport Express is that it has no remote, unless you get the
Remote Application for iPhone or iPod Touch - this may be a deal-breaker for you since iTunes is upstairs - is currently not a big deal for me as my Mac is fairly close by. There
may be other solutions for controlling, but I haven't looked for them.
A Squeezebox does have a remote, of course, and may be a better solution for you?