A Jailbroken/unlocked iPhone will work without ever needing to be activated, and will also work fine without a SIM (or with any GSM SIM for that matter)
Otherwise, you can't even access its features without activating it first. After it has been activated, I assume it can be used without the SIM card, but I've never used a non-Jailbroken phone since I don't live in a supported country
As for the screen of the Touch being inferior...I really can't notice the difference. Apparently some of the first batches had some problems with blacks and contrast, but in all the models I've used, the screen looks and feels exactly the same as the iPhone's. Plus, the Touch is slimmer and lighter.
I'd just get a Touch. You get more storage for the same price (32GB for $500). The reason the iPhone is pricier is because of all the phone features. I don't see the point of paying extra for features you are not planning to use.