The only reason the iPhone is cheaper is because you have to pay for the whole AT&T contract which in the end costs a lot more than the iPod Touch. If you are looking for which one you should get, I would recommend getting the iPod touch. The only thing you cannot do with the iPod touch is take pictures. There are apps to send SMS text messages (textNow, textPlus, etc.) and you can use Skype for phone calls (although you will need to buy a compatable microphone). I have an 8gig iPod touch and a cheapy free with contract flip phone, and I am perfectly happy.
Me, The App Store, and anything else i forgot to mention.