I don't understand why nobody has developed and released such a device before (maybe it's been done, but I just haven't noticed).
The way I see it, the ideal device would be a small box with two ports in it: one standard "stereo minijack" port (3.5mm wide, the type of port found in most sound cards and audio players such as the iPod) and one USB mini type B port (found in most cameras, takes the plug pictured right depicted here). Of course, the box would have to look cool in order to sell it to existing iPod owners.
Internal hardware would transform the analog audio from the stereo jack to a WAV or some other lossless stereo format (WAV is probably the best as it would probably require the least processing power to produce) and pipe it out via the USB port (which can be connected to a PC using a standard camera cable, included of course).
The device would come with software to interface with it and capture the audio stream, transferring it to a .wav file on disk. The software could also feature optional encoding to save disk space, but more importantly, it should be open-source or at least open-protocol, so that power users can improve the software (since hardware manufacturers always seem to make it utterly crap, except Apple) or write their own to interface with the device. (Why do software makers do this anyway? What possible financial gain do they have from using proprietary software and protocols just to support their hardware? Open-source makes it easier for people to fix problems themselves, and would increase sales to the "geek community" - for example, the success of the Linksys WRT54G router, which supports firmware mods because it's open-source.)
Another more expensive and unnecessary way of doing this would be to put some sort of flash memory chip onto the device and dumping the WAVs/compressed audio onto there, but this would greatly increase the cost. However, it would allow the device to double as a USB flash drive.
The reason for this? It would be a simple solution to all the DRM problems. First off, you wouldn't have to wait for someone to crack the encryption on a given DRM system just to load it onto your unsupported music player (assuming someone does it at all). Second, it would increase the popularity of online music purchases (people who don't buy due to DRM) and allow music that is only available on "protected" CDs to be extracted. Thirdly, the only way to block its use would be to force the user to use a proprietary audio player with special headphones/speakers.
Also, making the interface application or protocol open-source, or just dumping the files in WAV format would allow people to re-encode the music however they like, FLAC, MP3, OGG, whatever, depending on what they prefer and their music player supports. It would allow Linux and Mac users to use the device once someone had written an app to support it (since I'd imagine this would be quite popular with the "geek community", that probably wouldn't take long). Using the stereo jack also allows input to be captured from radios, CD players, PCs and audio players, depending on where the original source is.
There are a couple of weaknesses to the system; one, the audio is arguably lower quality due to being converted from digital to analog and then back again (and then re-encoded). This would be something to take into consideration when ripping from CDs and other high-quality sources, but downloaded DRM'd audio is usually encoded at relatively low quality anyway (at least low enough that it would probably be more significant than any quality loss from the conversion process). It could also feature an optical port if that is something that people really wanted.
Why hasn't any company produced this yet? Probably because of lawsuit concerns. But as far as I can see, this would fall under fair use in the United States (and I imagine most other places), and would sell quite well. Maybe I'm just deluded about how much DRM really annoys people, but if I had the money I would build and sell this myself.