Pros
You save a ton of money over paying for an iPhone (or any newer smartphone, really), whether you get a 3G data plan or not.
Dropped calls are about as frequent as they are on an iPhone.
Headset features work exactly the same as they do on the iPhone, so the experience feels very similar.
The high-end iPod touch offers twice the storage as the high-end iPhone (64GB vs. 32GB).
The iPod touch, bereft of a 3G radio, gets better battery life.
If you get a cellular data hotspot (like the Verizon MiFi), you can keep your iPod touch in your pocket while placing the MiFi elsewhere for a better signal.
A lack of cellular reception in your home is completely irrelevant since you can place your calls over Wi-Fi.
Cons
Despite being pretty close, phone features are not quite as seamless on the iPod touch as they are on the iPhone.
Dropped calls are not as obvious as they are on an iPhone, so it's not very easy to tell when you've lost someone without looking at the screen (bad for the car).
The iPod touch isn't built with the intention you'll use it as a phone, so you need to purchase a headset for it to really shine.
The iPod touch doesn't provide a GPS, so you will need to purchase an external GPS unit at an addition cost if you want to use it as a navigation device in your car (although you could try relying on Wi-Fi signal triangulation).
The iPod touch's camera isn't nearly as good as the iPhone 4's.
If you want to make calls using a cellular data hotspot (like the Verizon MiFi), you have to carry around two devices.
If you use a cellular data hotspot, its battery life is pretty poor (only up to four hours). While you can get an extended battery for your hotspot that'll last the day, it'll cost you around $100.