Ok, diodiel, here's audio 101:
You have an MP3 player, right? In your case it's an iPod.
Now what it does is, it has a hard drive, a memory, where the files are stored. Then it has a software that reaches those files and coverts the info (binary code) into a digital signal of sound. It's still binary, but now all those 1s and 0s came into some kind of order. That's the audio software we all use, like Winamp, foobar, windows media player... the iPod has an internal software for that too.
Then you have a unit, a hardware piece, inside the player that converts that digital signal into an analog signal (or electric, how you prefer to call it). It's hard to explain and I myself don't understand it very well, but it's like you take the info made up of binary code and associate an electric impulse to it. Anyway, that hardware piece is called the DAC (digital-to-analog converter).
Now you have an electric signal, but when it comes out of the DAC it's very weak. So you need another piece, which really is what uses most of your iPod's battery life, that is the amplifier. This piece takes that electric signal and increases the amplitude. Just imagine a sound wave stretching up.
And then that amplified electric signal gets inside the headphones and makes a diaphragm vibrate, thus creating sound.
So just to catch up: Binary sound files --> Music-playing software --> Digital signal --> DAC --> Electric (or analog) signal --> Amplifier --> Amplified electric signal --> Headphones --> Your head
Now, you have different ways of upgrading this. The E7 and E5 aren't better versions of the same thing. They are different.
One thing to have in mind: I don't think you can use an external DAC on an iPod or any other MP3 player. Think about, what would be the point of the iPod in that case? Just store and play the music? Basically the DAC is something you plug into a laptop and it works as a soundboard. That way all the laptop does is store the music in its memory, and play it on a music software (foobar, Winamp...), while the conversion/amplification is made by the DAC.
The E5 is an external amp, that means the signal it amplifies is already converted into an electric one. An amplifier can't improve the sound signal. The electric sound signal is only as good as the DAC, because, that's where it is created. The amplifier can however improve sound quality because it makes that electric sound signal "bigger", and you can use all of it on your headphones, with no distortion. The signal might have already been great and the headphones just couldn't play it very well, understand?
The E7 is a DAC/AMP. It takes the software playing the music, turns the digital signal into an electric one and amplifies it, usually much much better than the onboard sound card could do.
A LOD (Line-out dock) is basically a cable, or dock (like those speakers you plug into the line-out of the iPod). When you plug an audio device into the Line-out of a portable player, it acts as an amplifier. All the iPod does is read the files and convert the signal. This is called bypassing the internal amp.
So if you use a LOD and both the iPod Classic and Touch have the same audio-player software and the same internal DAC, yes, the sound should pretty much be the same. Plus it should improve a bit.
Now I need some coffee.
