A few years back, I accidentally jumped in the pool with my third gen iPod touch still in my pocket. I placed it in rice for a while, and it started working again, but the screen was extremely dull. Every day after that that I used it, the screen steadily got worse and worse to the point where I couldn't even tell what the background was anymore. Since then, it has sat untouched. I plugged it in today, and the screen is static-y and grey and indistinguishable. It still functions, but I can only tell due to my own memory. Is it worth anything? If not, where could I properly dispose of it?
Are you interested in purchasing a new iPod Touch? If so, you could check out Apple's Recycling Program.
From Apple's website,
Bring your old iPod to an Apple Retail Store and receive a 10 percent discount on the purchase of a new iPod.*
I'm not exactly sure if you would qualify due to its screen, but it is definitely worth a shot. Take it an Apple Store and see if they will give you 10 percent off.
From an Apple Discussion Board,
... you can throw it away, bury it, smash it, take it to Apple as recycling, use it as a paperweight, leave it in a drawer, etc.
I just checked on Newton's Head, and they will offer you
$5.50 for an iPod Touch 3rd Generation, water-damaged with all original accessories.
So, it's not going to be worth that much.