The point of the line-out on the Ipod is that it skips the junky headphone output stage entirely and replace it with a dedicated unit.
Volume control in portable players is almost always done in software. It takes an extra chip to have an analog volume control: that sucks up PCB real-estate & battery life. Many newer DAC chips have a volume control built in, and its not hard to process externally if not.
Stock Ipod line out comes straight off the DAC through some caps to the outputs.
Imod bypasses the caps in the ipod and replaces them with external caps which allows more room for "bigger and better" caps like film types.
When used "tastefully" (between max level and 20db of attenuation) digital controls actually work quite nicely. The problem is that pretty much nobody on head-fi, or in most of audio-philia for that matter, has gain structure that allows only 20db of attenuation so digital controls get an undue bad rap. Even resistive analog volume controls work better at lower attenuation (max volume), but they are not quite as offensive as digital controls at -50db.