03-06-11: Gordguide
There is no digital out available via the iPod's USB (or Firewire) ports on the 30-pin connector. There is an analog out at line level there, and it is much superior to the iPod's built-in headphone amplifier, so that is the output of choice for best sound quality on a bone-stock iPod.
Man, this thread was resurrected from the dead. I started it back when the task was not possible - As I understood it, that was because of technology or permissions that Apple was not releasing/licensing. That changed with the Wadia 170i I believe around 2007 or so(?). The Wadia unit somehow extracts a digital stream from the iPods connector dock. You can then hook the Wadia's output to a DAC and, Viola - mo betta zeros and ones! Since then, as Larry_S pointed out, others have followed (probably paying the license fee to Apple I'd bet).
However the early iPods with FW I still don't believe will work, going back to the earlier point about no digital audio data available in the iPod. Whether USB or FW, the iPod is seen simply as a Hard Drive, not a Digital Audio Stream.
I've never seen an iPod with Firewire - just connectors that hook up to the Dock below and yield a USB or FW connection. I don't see your point about the iPod being seen simply as a hard drive - with a digital stream you just need a hard drive with digital audio files on it, and a devise capable of delivering (in this case the Wadia for instance), and translating them (a DAC). What's wrong with being just a hard drive? As I understood it, the only thing keeping anyone from extracting a digital audio stream from any iPod was Apple.