Converting old iPhone into iPod

Hey everyone,
My father recently cancelled his iPhone 3G contract and went back to a regular phone, and he converted his 3G into an iPod touch. At the same time, he got a deactivated SIM card for his old Original iPhone; however, when we plug in the original iPhone into iTunes, its asking us to set up the phone as a new AT&T phone again.
My question is, if we go ahead and set it up with his wireless number, will it charge us $30 for the data plan again even though its technically a deactivated SIM and all we are doing is activating it so the phone stops bugging us to connect to iTunes?
Once again to clarify:
iPhone 2G + Deactivated SIM asks for setup as new phone on AT&T (but we don't want to set it up as a new phone)

You obviously don't understand what I provided.
Why are you inserting a SIM card in the first place if you want to use the iPhone as an iPod Touch? Not using the iPhone since it was deactivated 2 years ago or regardless when it was deactivated doesn't require inserting a SIM card in order to sync the iPhone with iTunes or use the iPhone as an iPod Touch.
If you are trying to install a firmware update or restore the iPhone with iTunes (which installs the current firmware) without activating the iPhone, you need to insert the no longer activated SIM card that was used with the iPhone when it was activated in order to complete the process. There is no way around this. If you activate the iPhone, it is no different from activating any other iPhone.

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