The below extract is is what cranky explained to me and I thought I should display it to the forum members so that it may guide them aswell.
Thank you very much cranky for your time and your sincere efforts:signthankspin:
No portable player has a digital output to connect to a DAC. There is *no* way to connect it to a DAC, you have to go straight into the line input/aux input of a preamp or integrated.
The iPod can do it with a specialised dock. The only one I know is the Wadia. There may be others. A lot of AVR manufacturers have docks too, but they mostly use analog.
There are three parts to a portable player. Storage capacity, user interface, and digital to analog conversion. The three are not linked to each other. You can have a 1GB player with excellent SQ, and you can have players with brilliant SQ but terrible interface, and you can have players with an excellent interface and average SQ.
DAC part has got nothing to do with file formats - that is about software support, the digital to analog conversion is done in hardware. The iPod cannot play FLAC. The S:Flo can play everything. Both are identical in the control hardware (not the DAC part, that is different). There is a software called Rockbox for iPod, you'll have to research it. It basically voids the Apple warranty and changes the firmware to something more customisable and it can play FLAC as well. Sound quality will still not be as good as the S:Flo 2, and stability will be a little worse than the stock Apple firmware, but it will work.
No player I know of will expose the digital output to the user - it assumes that headphones will be the primary mode of listening, some (like the S:Flo) also provide a higher quality line out for audiophiles (the iPod also has a line out, accessible from the dock connector). This is a fixed level output. The volume control of the player has no effect on it - just like your CD player. The preamp or integrated needs to control volume.