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Buy a CD. Rip in lossless.
If your songs are in lossy format (e.g. mp3), it is impossible to "upgrade" them to lossless because some information is already lost when compressing the songs to that format. The only way is to rip the songs again from the source CD in lossless format.
For ipod touch, I would recommend add an amp to it. You can go to the portable amp section in this forum to have a look.
at the moment, there is a lack of large capacity portable player that will play .flac, the 'only' one out there is the Cowon X7, but that is hardly portable, what we need maybe is a version of rockbox that will finally support ipod classic, then i will be laughing
other than that, look for apple lossless format, which is better than std mp3 but not as good as proper flac (correct me if I am wrong here?)
There are players that support micro SD cards. Considering 64 GB cards are available and you can easily swap them out, its not as far fetched as you may think. Now I wouldn't say an ipod or apple products for that matter are audiophile grade. You can buy an amp and specific DACs meant to bypass the internal parts which turn it into such a device, but at a premium and very bulky. Not really worth it IMO. There are also other players such as Hisound Studio V 3rd ANV, ibasso DX100 and the Hifiman 901 if you are considering hi-grade players. But there are compromises on the UI in comparison to the ipod.
About lossless dubstep.. imo, the easiest way to get them authentically lossless is via a store called "Beatport" but you'll have to pay (you'll also have to pay a little more because of the "lossless upgrading fee")
About the iPod touch, it sounds quite good to some extent but maybe not quite "audiophile-ish".
IMO, there are plenty of better-sounding devices that costs roughly the same as the iPod touch.
And if I'm correct, iPod touch(es) use Cirrus Logic's audio chip that sounds good but not like something audiophile-ish from the Wolfson found on other players and smartphones.
But you can hook it up with something like Cypher Labs Algorithm Solo or Fostex HP-P1 to process the audio files outside the iPod touch using superior chips on those devices. Thus make the iPod touch sounds up to the level of "audiophile".
Sandisk Sansa Clip Zip 8Gb = £50 in the UK
Sandisk 64Gb micro-sd card = £40 in the UK
Rockbox for the Clip Zip = Free
Use something like dbPoweramp or similar to rip your CD's to FLAC, and there you go, a pretty high capacity and extremely portable player, with good sound quality for less that £100
Alternative DAP for not much money and with excellent sound quality would be the Colorfly C3. Note that this player is geared towards sound quality though, and does not support playlists or gapless playback.
I'll just answer this part of your question. IMO no, ipod touch is not audiophile it's mediocre and mainstream, a device that does apps and happens to have built in music player nothing more. I know this from owning one and comparing it to Cowon players which imo are audiophile players. Moving up to Cowon there is a fuller sound quality which shows greater instrument separation and detail. When I A/B them beside each other there is a clear difference in fidelity, resolution, clarity. I would recommend for GR07 to use something like Cowons C2 which I have tested and did much research on before deciding it would pair well with that IEM.
Using Cowons higher powered headphone outs you will be escaping the need for an amp in most cases, which GR07 doesn't really need anyway. though what GR07 does require is dedicated amounts of power to sound full and dynamic with correct bass response. In my experience the touch will provide such power but the sound quality will be average compared to something like C2.
Have a look at Cowon C2 or iAudio10 for cheaper alternatives. To be honest my C2 sounds almost identical to my more expensive S9. It's mostly the O-led screen that pushes up the S9's price. The C2 can be found on ebay through dream-seller for $110 US (4GB) SD expandable 55 hours battery life. I'll let you do some reading on it. More or less it has the sound of all Cowon without breaking the budget for frills and gimmicks.