Quebert is right, it's more expensive once you factor in the required 2 year contract and data plan. Look at what they are selling for on Ebay.
If you buy an iPhone and immediately drop it and pay the fees, it costs:
iPhone 32GB 3G S - $299 + $70 (1 month service) + $35 (activation) + ($175 early termination fee) = $580
vs.
iPod Touch 32GB = $370
And Quebert is also correct - there is likely going to be a new iPod Touch announced in early Sept. and the rumors are that it will have a camera.
In terms of features:
iPod Touch
Thinner
Lighter
Cheaper (w/o a contract)
Nike+iPod capability
Less hassle purchasing it
iPhone 3GS
Cell phone capability
3.2MP autofocus digital camera
video recording and editing capability
GPS
Digital compass (somewhat handy with the GPS)
Faster CPU - faster load times on games and better responsiveness overall
128MB RAM - faster load times on games and better responsiveness overall
Voice memo capability
Voice control - "play playlist classical", "shuffle", etc.
Corrected - thank you to TheStu