The AKG k702 don't appear to be closed so they will probably leak some sound. AKG makes some fine headphones.
If you want to play FLAC files on your iPod you can check this website out. Rockbox is an open source firmware for a variety of MP3 player models. You can check to see if your model is supported and if it is a stable port.
http://www.rockbox.org/Features of Rockbox
http://www.rockbox.org/wiki/WhyRockboxLittle dot is still still around, they recently restructured their website, it can be found here
http://www.littledot.net