Ipod newbie question?

Update: I just purchase and Audio GD Sparrow dac that has a USB input. Can I go directly from the ipod to this dac via USB or should I get a usb to coax converter? Thank you!

you would need a dock that pulls the digital signal off of the iPod before the iPod converts the signal to analog. The Wadia iTransport dock does this. Place you iPod touch into the Wadia dock and go with digital coax from the dock to your DAC. There are several of these Wadia units on A'gon now, search on Wadia and look at the iTransports. You also get a remote that will control the iPod track, FF, seek, etc.
Good thing you have a touch, earlier generations of iPods do not allow the digital signal to be separated before hitting the output stage...only most current generation of iPods/iPhones/iPads do this...

my brother has a system configured like Realremo suggested....it works fine for low cost.

Xantech BT6 wireless bluetooth dock, using the bluetooth feature in your ipod wirelessly sends signal to the dock which is connected to any line input. Allows you to operate the ipod from your easy chair.

There's another dock that extracts the digital output of iPods/iPhones/etc. it's the Pure something or other (can't remember model number). It's about $100 vs the much more expensive Wadia itransport.

Another method is the HRT iStreamer. It's $200 and has its own internal DAC. doesn't have digital outputs though. I'm pretty tempted to try it out for a headphone system I'm putting together to keep things very simple and minimize boxes.