The iPod Touch is definitely much nicer for watching videos compared to the Classic. Granted, this is one case where the Classic's bigger storage capacity is beneficial. Still, I'd rather be able to bring 2~3 full length movies and watch them on a 3.5" screen than 10 movies on a 2.5" one.
For music, 60GB should be enough for 500 CDs at 256kbps AAC (same quality as iTunes Plus) unless you plan on storing losslessly compressed audio on your iPod (imho, a bit wasted given the iPod's sound quality).
Personal set-up:
FLAC (lossless) audio on server PC
AAC (320Kbps) duplicate on 2 computers: one laptop and one desktop used to sync to portable devices and Home Sharing
Just for clarification, the refurbished 64G iPod Touch selling for $249 on Apple's website isn't the 4th generation model with A4 CPU. It's the 3rd generation one with Cortex A8 600MHz same as the iPhone 3GS.
Given the choice, I would opt for the iPod Touch.
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