I would recommend the SD card with your Inc. For the price of an ipod touch, you could get 2 32gb micro sd and an extended battery.
If you still prefer a dedicated device: I recommend looking somewhere else than Apple. I prefer Creative for the sound quality, but I haven't used a dedicated MP3 in awhile. Their latest is a 3" touch that can also have various apps made for it ( though it's dedicated, so don't expect much...NTM they appear to be switching to Android ), it supports virtually every format you throw at it including Itunes Plus Unprotected AAC....and it also has a micro-SD slot that appears to support up to 16gb. There is also an FM radio...all this and the 64gb version is currently $250:
ZEN X-Fi2 64GB | Creative Labs Online Store
I know there are a few others, but like I said: I'm out of touch a bit on the dedicated MP3 player...I just use my Inc.
Remember, Apple charges more for less. Always shop elsewhere