Just ran through a series of conversation recording tests and wanted to summarize the results:
Conversation Recording on env touch
1) I have hardware version 1.0, software V11KV04, bought in Nov 2009
2) With the phone open, the spacebar has a head/voice icon.
3) Press the spacebar and the env Touch records only the other side of the line. Your voice does not record.
4) There is no timer or indication that the phone is recording. The timer on the screen is the call timer.
5) On my version, the CLR button does not start recording. Some env Touch versions do.
6) You can close the phone and the recording continues.
7) You can use a bluetooth headset while recording. Again, only the other side of the conversation is recorded and you can close the phone and continue recording.

If you plug a recorder into the headset jack, the phone thinks it is a corded headset, so you can't carry on a conversation.
9) The record button in My Sounds records from the phone mic or an external mic. No way to access a conversation for recording.