In reply to:

I've been in the software development business long enough to know that this is often not "good business" sense.

Can you cite, specifically, what the problem is? You have a customer who CANNOT do anything with the source code you've given him and maybe can't even release the code he writes except through you (depends on how restrictive the NDA is), the customer is willing to do that for free and without any support from you except for keeping his codebase current (a fair and easy thing to do).

In reply to:

They are running the show as a business. There are other things they have to take into account. Let them run the show they want to run it. They've given their answer, and I think it's safe to say that nothing will change their minds. Constant nagging will probably change their minds.... but in a negative way!

You can't have it both ways. If they're running the show as a business, then they'll be professional at all times and "someone's nagging" would not change their business model. There have been a number of times where things which seemed fairly firm got changed mainly through constructive criticism and vocal objection by the masses. (the most recent example of this is the ISO plug-to-wires deal).