The install of my screen protector on my Touch 2G went perfectly, totally straight and not a single bubble. That said, I didn't feel as though I put my devices through enough of a hard time to warrant doing the same on my new 4th gen Touch, so I haven't been using one. No scratches whatsoever; bar a few fingerprints and smudges it looks as perfect as the day I bought it. So... that's the reason I buy expensive toys then neglect to put an inexpensive bit of plastic over them... it's unnecessary* *For what I use them for. If you're gonna put crappy bits of rubber on top because you can't afford/refuse to buy a games console with analog sticks then yeah, you're gonna risk scratches.
If they didn't cost so much I'd be tempted to pull mine apart and see. The obvious answer though is while it looks and feels like rubber it's somehow conductive so it isn't actually rubber. I really don't know if it's some special material or if there's something super conductive behind the rubber it's actually puzzled me since I've bought it. Here's a picture of mine if it helps As for screen protectors they can be a pain to apply but the easiest trick to them is go somewhere with no dust at all like a kitchen and take it slow and steady. I've ruined a few in my time I admit but the one on my Ipod now is totally invisible and pretty much perfect.
FWIW, the makers of the Fling contacted me today asking for photos and purchase confirmation. I was very pleased to get such a prompt response. Didn't expect to hear from them till tomorrow at the soonest.