Well after several hours today and yesterday working with DarkIce, Ices2, and IceCast2, I've figured out that the problem is in relation to devfsd. Apparently it binds to the devfsd device and receives no data, and encodes empty frames and streams silence. Now here is the kicker. Silence in both lame and oggvorbis encodes down to nearly nothing. So nearly nothing infact that remote clients time out before they buffer, but they are now connecting and buffering which as lilo pointed out, is great progress. I would like to see this work and hopefully we'll find a fix.
Almost forgot, this just in from the did-I-really-need-this-new-hardware-dept.
I got a new professional Shure SM58 Mic, and another half gig of DDR WOOHOO!