Your options really don't make any sense; they're so different (one's a phone, one isn't!) that whatever you get won't fit your needs very well.
[...]
Keep your first gen iTouch, you'll have a phone with a great camera, sorted?
That isn't really an option anymore.
This is kind of a big thing. I sold my 1st gen. iPod Touch for money towards an LG Dare or new iPod Touch, but I think I'm gonna go with the phone. I'll just ask for a new iPod Touch for Christmas.