How to use old 1st gen iPhone as iPod after deactivated?

I just got a new iPhone 4S and gave my first generation iPhone to my kid to use as an iPod. I transferred the phone number so now the new iPhone works as my phone and the old iphone did not connect to AT&T but did work as an iPod (or through wireless). Rather than just sync'ing to his computer, he erased the iPhone somehow while it was not connected to a computer. This apparently erased everything including activation. Now when he hooks up to iTunes on a Mac or PC, he automatically goes to iTunes Store and gets a page asking for him to activate. The iphone has multiple languages on the screen and window for making emergency call so it looks like he wiped the old iphone "clean". From reading discussions, my impression is that iPhone needs to be activated before you can use even as an iPod. So my question is how can I get this old iPhone to work as an iPod?
I do have Time Machine backups of my Mac from when the old iphone was activated and connected to AT&T. Is there some way to use this to restore iphone to the way it was before the above?
I suppose the other option would be to do some kind of jail-break fix?
thanks

More inof:
I saw an old post that said: "Does original iPhone work without phone service -- Yes, but you won't be able to install future firmware updates or restore the iPhone with iTunes if wanted or needed.. Both require the iPhone being activated."
Not knowing this limitation, we did a full restore/reset on an old 1st gen iphone, so is there anyway to get it working like an ipod. Per above, I get a screen asking me to activate.
AT&T even obliged me by allowing this phone to be reactivated (for a few days) and gave me a new sim card to put in the phone, but it wouldn't reactivate probably since it's so old: AT&T didn't know what to do and Apple wouldn't deal with a product out of warranty.
So now phone is not activated and am basically locked out from using as ipod.

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Subsription will be cancelled; how to use old paym...

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This post was transferred from its previous location to create its own new topic here; its subject and/or title has been edited to differentiate the post from other inquiries and to reflect the post's content.
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More inof:
I saw an old post that said: "Does original iPhone work without phone service -- Yes, but you won't be able to install future firmware updates or restore the iPhone with iTunes if wanted or needed.. Both require the iPhone being activated."
Not knowing this limitation, we did a full restore/reset on an old 1st gen iphone, so is there anyway to get it working like an ipod. Per above, I get a screen asking me to activate.
AT&T even obliged me by allowing this phone to be reactivated (for a few days) and gave me a new sim card to put in the phone, but it wouldn't reactivate probably since it's so old: AT&T didn't know what to do and Apple wouldn't deal with a product out of warranty.
So now phone is not activated and am basically locked out from using as ipod.

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-patrick

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How to use old 1st gen iPhone as iPod after deactivated?

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