<p>When submitting an app to the app store what is the real difference between iPod Touch and iPod Touch 2nd generation?  </p>

The first-gen iPod touch doesn't ship with iPhone OS 2.0, which is required to run App Store apps. End-users can purchase iPhone OS 2.0 for their first-gen iPod touch from Apple.
From an SDK perspective, I'm not sure what, if anything, has changed.