iTunes sees a firefly share as a shared music library. As iPods have been made very anti-piracy-like, it is not possible to fill your iPod from a shared music library. Therefore, you can only fill your iPod with music on the local pc.
Unless you’re running iTunes on the WHS itself. Then indeed, you’ll have to transcode the flac files to a format iTunes does support. But then you won’t be using firefly.
The point is, firefly does support flac because it sees when a client doesn’t support flac. When this is the case, firefly transcodes the music on-the-fly making the client ‘compatible’ with flac files.
But this is for streaming purposes only, not filling iPods and such.