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Rockbox is an alternative (open source) firmware that will run on many iPods. One of its cooler features is that it supports several audio codecs such as OGG, AC3 and everyone's favorite lossless codec, FLAC.
What's also interesting about Rockbox--and this is slightly less talked about--is that it handles gapless playback really nicely. Instead of pausing or fading between songs, Rockbox will start the next song immediately after the previous one ended. This is great for playing back audio taken from electronica and live/concert CDs that blend one track straight into the next.
My friend Justin went about upgrading his 4th gen iPod to use Rockbox the other day and he ended up upgrading his iPod's hard disk and battery as well, in order to accommodate playback for all the larger FLAC files he's been encoding. Thankfully, he put together a nice little howto which documents the whole process, including the tinfoiling of his new drive (above photo), which eliminated an EMI issue that he encountered with the new disk.
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