Here's what I did.
It can be used as an iPod, even with some old, canceled SIM.
I bought four used iPhones. Our daughter was using an ATT go-phone. I gave her my Samsung Solstice, we put her go-phone SIM in, turned it on (we always have them powered OFF before putting the SIM in) and it worked like charm. So I got her the first iPhone (used), put the go-phone SIM in, turned it on, it worked like a charm - never a problem.
My husband and I both have ATT phones on contract, as family members on my parents' plan (nice and cheap!!) I bought us used iPhones, put the SIMs in, turned on, work like a charm - never a problem.
Last one in the family, got him a go-phone last week (Aug 2, 2010). The SIM was orange/white, not blue/white, like our daughter's SIM from three years ago. Activated the SIM in his little go-phone (el cheapo), then tried putting it in his iPhone and NO GO! I've tried everything, but no go. I even bought another unregistered SIM card off craigslist, which is identical to our daughter's go-phone SIM, and STILL no go. I had to do a restore (SEE NEXT PARAGRAPH) on his phone to even get it to sync on his computer. While this still didn't register the SIM (jailbreak is my next job), it DID allow him to start using it as an iTouch, including wi-fi, iTunes, App store and updates and all the things a dedicated iTouch does. Any SIM will work for the restore, even one from a canceled acct.
BUT, here's the kicker I learned the hard way on one of the other phones I bought: apparently, if you do a restore without a SIM card in there, it will lock it up and has to be unlocked by ATT. I ended up having to call ATT, and because they couldn't walk me through an unlock via phone, they finally just sent me a new iPhone, which I promptly turned around and resold - never even used it once.
So two things: (1) it will serve as a dedicated iTouch and (2) it could lock up your entire unit to do a restore with nothing in the SIM slot.
