I have both the 1st gen nano and the iPod Touch.
The Touch is definitely an upgrade: you get a GIANT screen, Wi-Fi, and other useful stuff like web applications. Like if you want to check the weather before you go out in the morning, you never have to turn on your tv or computer. And with the new firmware 2.0 coming out, you'll get even more with the Touch. (I could go on and on about the benefits. =P)
I assume the screen for the Touch is no different from the nano screen. I've never removed the screen protector that came with the Touch and it's protected my screen ever since. I know some people get annoyed with the screen over the button at the bottom, but you can lift the edge up and cut off the bottom. =) But I do suggest you buy a case for the Touch since the back is chrome and we all know how easily that scratches. Being only 8mm thick, a case wouldn't make it too bulky anyways. I have
this case and I really like the cover. It comes in different colors too. If you don't like covers then I recommend
this one, and it comes with a free screen protector with the button hole already cut out. =)
Although, the Touch isn't for everyone. If all you care about is music, why not go for the current gen nano? You get a little bit of video if you ever need it too. For me, when I'm on campus I don't want to carry a laptop but I do some emails and web browsing, so I chose the Touch. Size isn't much of an issue for me 'cause I'm a girl and I can just put it in my purse.
Anyways I would rate it 9.5/10. -0.5 for sometimes I get frustrated over the touch screen. Like in the winter when my fingers get cold it's a bit annoying 'cause the touch screen is by heat.
Happy shopping!