I was looking at this too and actually ended up going with the innotab 2 instead of both of those. The newer model was made smaller and to do that they made the screen smaller and took away a lot of the protective covering. (My nephew has the 3). The only other real difference I could see was the quality of the camera is a little better in the 3/3s.
The games they play are the same cartridges and downloads so no difference there. And because he is only two he wont play the games yet anyway. We essentially got it to load cartoons on. We spend a lot of time in hospitals and waiting rooms so we wanted something he could have as a bit of a treat to watch when we got to places he finds boring. We bought a 4gb memory card for it and uploaded four Thomas movies and a bunch of Disney songs, there is stilla fair bit of space for him to play with the camera.
No matter which one you go for I would recommend getting the charger and memory card on ebay as you will save a fortune that way, the shops charge loads for them.