Can an iPhone be used without phone service . . . just connecting it to a computer and downloading/transferring apps?
When I replaced my iPhone 3G with an iPhone 4, my 3G still worked like an iPod. I had to put it in airplane mode though, because I think it was wasting a lot of battery power trying to find a signal. Then I gave my iPhone 3G to my brother and did a factory reset on it, and it didn’t work anymore.
So, I think you need service to begin with, and then you can cancel or whatever and it’ll still work.
The iPod Touch is an iPhone without the phone. Some apps only work on the iPhone, but there are tons of games and service apps that work on both.
One of my golf buddies was in exactly this situation, and he discovered that taking the SIM card out of his old iPhone stopped it from attempting to connect to a cell tower as a cellphone. He gave the non-SIMmed iPhone to his wife, who has been cheerfully using it as an iPod.