check out the apple's airport express. It has a digital out and can also play Internet radio which isn't possible on an iPod. I'm running a toslink out to a sharp digital receiver. the sound out of the box wasn't great but it is improving nicely after 24 hours.
http://www.apple.com/airportexpress/
"Enjoy your iTunes music library in virtually any room of your house. Share a single broadband Internet connection and USB printer without inconvenient and obtrusive cables. Create an instant wireless network on the go. Extend the range of your current wireless network. How many devices do you need to do all this? Just one."
Presenting AirPort Express.
http://www.apple.com/airportexpress/
"Enjoy your iTunes music library in virtually any room of your house. Share a single broadband Internet connection and USB printer without inconvenient and obtrusive cables. Create an instant wireless network on the go. Extend the range of your current wireless network. How many devices do you need to do all this? Just one."
Presenting AirPort Express.