What are the differences between an iPod touch and an iPhone 4S?
The iPhone 4S has a much more powerful processor and better graphics performance. It's a dual core A5 processor, whereas the latest iPod Touch 4G still uses the A4 processor.

You will see a better throughout system performance and have the ability to play more resource demanding games. 

If you're looking for my opinion about what to buy, I recommend you buy the iPhone 4S. After all: You can always use an iPhone as an iPod, but not vice versa.