First of all (and most obviously), the iPhone is a phone and an iPod, while the Touch is simply a really nice iPod.
The Touch also:
- has more storage capacity (8, 16, and 32 GB models)
- is thinner than the iPhone 3G at 8.5mm versus 12.3mm
- has no monthly fee, for internet or otherwise
- has a silver back
- has a longer battery life (36 hrs. audio versus 24)
The iPhone:
- comes with a built-in 2.0 megapixel camera
- comes in 8 or 16 GB models
- can access Wi-Fi for free (like the Touch), but can also use phone connection for fairly fast internet when Wi-Fi is not available
- is slightly cheaper on a plan than the Touch (base model is $199, versus $229 for Touch)
- has a black or white back (8gb in black only)