Using 2G iPhone as iPod: Upgraded to 2.1...iTunes will not mount phone??

Here is the deal, I bought the original iPhone on Day 1. I then purchased an iPhone 3G on Day 1. I was using my first iPhone as an iPod touch.
I upgraded my iPhone 3G to 2.1 with no problems. When I went to upgrade my iPhone 2G, everything seemed to go fine until the phone rebooted. I get an error message from iTunes 8 (35):
The iPhone "Eric's iPhone 2G" cannot be used with iTunes because the information required for activation could not be obtained from the iPhone. Check that the SIM card is inserted in your iPhone and that it is not PIN-locked.
See error message here:
http://www.installuniversity.com/iphone.png
Before this error comes up, iTunes says it is "Waiting for iPhone..." I have access to the emergency call screen and that is it. Any thoughts on how to rectify this? It won't mount in iTunes so I can't restore to a previous backup.
The phone has never been jail broke or anything like that. I live in the US.
Any help would be appreciated. I am on a Mac 10.5 as well.

Eric,
Did you have to reactivate your phone? I'm in the same issue myself, my problem is I lost the SIM card that went with my original iPhone. Picked up a new SIM from AT&T to see if that would work, and iTunes wants me to activate the phone. Granted it's using the phone number that is now attached to my iPhone 3G. I didn't activate it, but I'm wondering what you mean by the deed is done in your last post.
Would be nice if Apple prompted a user during the firmware update asking if you want to use your original iPhone as a Touch. Would make sense, since both Apple & AT&T know that the original has been deactivated.

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