IOS – iPhone 3GS activation error on iOS 5 upgrade – “No SIM card in phone”

This is, unfortunately, expected behavior. Whenever you activate an iPhone (which you do as part of an OS install) it talks to Apple's servers and does various things like exchange crypto certs for APNS, etc. It also checks the IMEI of the phone to see what carrier Apple sold it to, and validates the SIM is valid for that carrier (if you buy an unlocked iPhone in a country where you can buy either locked or unlocked phones the vendor will actually copy down the IMEI number of a normal locked phone, and then enter in their system where it gets pushed to Apple's servers as an unlocked phone, there is no physical or configuration difference on the phones).

The easiest way to get it activated is (as you surmised) to use an AT&T SIM. You mentioned you have an iPhone 4, you can activate it with that SIM. There are plenty of companies that sell microSIM to SIM adapters, but if you want to do it right now you can just place the micro SIM directly in the iPhones 3GS's SIM try with tape. I would not recommend doing this on a device you intend to keep the SIM in for a an extended period because the SIM is likely to come loose (and jam the SIM tray), but if you are just inserting it, activating it, and removing it you should be fine so long as you are pretty careful with how you apply the tape and not shaking the phone too much.

The message you describe is what happens when a locked phone is restored by iTunes without a SIM present from the carrier that the phone should be locked.

You could use any of the IME I look up tools on the Internet- some are free and some are paid and all make me worry they are harvesting databases of IMEI/serial number/other data in exchange for providing you a service by looking up your phone in the carrier database.

Of course, you can always contact the carrier in question to see what is needed to get service or a Sim card for that device.