Sorry to hear about your iPod Classic. It's still the best Apple product of all, in my opinion, but getting an iPod Touch is certainly not a bad trade-in!
Apple actually made a big jump from the 3rd generation ipod touch to the 4th generation ipod touch. Check out those links to the teardowns if you want an in-depth look into the differences. Otherwise, here are a few of the highlights:
- Better speakers
- Better processor (Apple A4. Same one found in the iPhone 4 and iPad 1)
- Front-facing camera
Basically, the 4th Generation touch will be a little bit sleeker, faster, and has a front-facing camera. Both are pretty solid devices and should suit you very well. Neither has an advantage in memory or storage, so it really comes down to a) how much the listed features above matter to you, and b) the price difference between the two and how much you want to spend.
I hope this helps you make your decision! Good luck!