I have used a 5.5 Gen iPod, a 6 Gen iPod and a 3G iPhone. I can not hear any sound difference, however the difference is in the interface, the older units have a limitation where the user will not be able to control the iPod with the click wheel and choose as with the 6 generation and later. See below for a copy of what Wadia has on their site.
iPod nano G1 and iPod video will automatically enter the “extended interface” mode when docked in the
170iTransport; the Wadia Logo will display on the iPod screen indicating digital audio output is now available.
While in the “extended interface” mode there is no control of the iPod from the click wheel interface. If you
choose (queue a selection) before inserting the iPod into the 170iTransport, the 170iTransport will continue to
play your selection until it is complete. If there was no previous selection, the 170iTransport will play the entire
content of the iPod in the “All Tracks” order. The 170iTransport will not manipulate the shuffle setting. Whatever
shuffle setting the user has chosen before connecting the iPod will be honored by the 170iTransport. The Wadia
Logo will be present on the screen of the nano G1 or iPod video the entire time the iPod is docked in the
170iTransport and the digital signal is synced.