Don't try to alter a dock connector that you arleady have. All you need is a 1/8" stereo patch cord and male dock connector end that you can order online at the link below. The guy takes paypal and they are only $2.50 a piece, so order several as it's easy to screw them up. They ship from Europe (Sweden, I think) but I got mine in about a week.
You're only soldering to 3 pins (Line-in left, line-in right, and ground) but the dock connector has 30 pins, so I would snip off the pins you are not using that are adjacent to the ones you do need to use. I also cut a strip of playing card and slipped it under the pin I was soldering to so that I could isolate just that one.
http://home.swipnet.se/ridax/connector.htmThere's nothing on the iPod that displays signal level, but I'm hoping that it is coming in the future. Audacity has realtime level meters and I'm hoping someone can port that feature to the iPod. The iPod writes directly to .wav, and I converted that track to mp3 in Audacity.
To record, you simply boot your iPod to ipodlinux (you can choose the boot os at startup by holding a key combination). Once it boots, you just scroll down to "Extras" > "Recordings", select line-in, set your sampling rate and click start.