ipod Touch sound Question

So i just got a 4g to replace my second Gen, but im have become a bit confused with the way the loud speaker sort of works, with the 2G you put volume all the way down no sound at all, with the 4G you turn it all off, and you still have sleep/wake. So i went into setting and found ringer, but then i found out that when you have ringer off, and sound off, it still makes sounds, so im confused... How do i get it to behave like a 2nd Gen?

Also small problem, when i 1st turn my ipod on, for like 2mins if you touch the top of the screen, it makes a rainbow effect, sort of like pressing hard on an iMac Screen