woah woah woah. ya, you're right and he's wrong, but let's stay calm and focused on the OP's question.
short and sweet: you can take the SIM card out and use it as an iPod. however, if you want to update or sync the phone, you will have to put the SIM card back in. so if you're going out of the country and will want to sync or update, bring the SIM card with you and keep it some place safe
I gave my friend my 2G when I got my 3G, and we had to put my SIM card back in whenever he connected it to his iTunes and it was never fun driving over to his house to do it. Long story short, we almost lost the SIM card between the seats of my car. It was not fun fishing it out with pencils and the lanyard I have on my keychain