No hardware revisions are necessary. The digitization playback is achieved by bit-banging the volume register of the SID chip to simulate a digital playback device. Essentially, the SID can be used as a 14-bit digital playback device. What's amazing is that the thing sounds as good as it does playing back digital data.
A great article about digis on the C64 can be found here: http://sid.kubarth.com/articles/the_c64_digi.txt