IPhone - SIM = ???

Hi all,
I am posting this on behalf of my employer, who has an iPhone. (So do I, but I'm not having any problems with mine.) He bought it last year, used it for a while, and then decided to take the SIM out of it and let one of his kids use it as an iPod. All was well until the new 2.0 software came out; now the phone is asking him to insert the SIM all of the time. The problem is that the SIM is now in his Blackberry, and we've been told by a rep at the AT&T store that each time he inserts the SIM into the iPhone, it could potentially renew his contract and ding him for an $18 upgrade fee.
So: The question we have is, is it really possible to use an iPhone as an iPod and not get prompted for the SIM all of the time?
Thanks in advance for any helpful info.

Yes, as long as you NEVER try to update it.

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