TUAW essentially describes how to unlock an iPhone for use as a Widescreen iPod + Wifi -- without a contract, and a $49.98 one time fee.
The first step involves faking bad credit by typing in "999-99-9999" as your Social Security number during activation to trigger the GoPhone/"Pick Your Plan" option which allows for contractless pre-pay plans. The cheapest version of "Pick Your Plan" is $49.98 (rate plans).
Then, according to TUAW simply taking out your SIM card allows you iPhone to continue to function as an iPod + Wifi device without any further hassle.
Removed SIM entirely. It complains but works at 6G WiFi iPod. Tried placing call. "No SIM card installed". Failed. Connected to iTunes. Synced without any problems I could detect. WiFi fine.
Presumably, you could then cancel your $49.98 month-to-month and use the iPhone as a Widescreen iPod + Wifi device. This theory has not entirely been tested, so proceed at your own risk.
Update: Alex King posts in his blog that he has done this... though he simply canceled his contract and didn't bother with the whole Pick Your Plan mess:
I canceled the AT&T service for my iPhone as planned and the iPhone seems to work just fine as a wifi-only device. Excellent!
I reset the iPhone, synced, etc. and it still works without service. No guarantees that it will continue to work, but for now it looks like Ive got the video iPod and iPhone test device I was hoping for.
He notes that if you cancel within 30 days, you do not have to pay the $175 termination fee.
