Transferring an old iPhone after I upgrade?
I just did this myself - I upgraded to an iPhone 4 and gave my sister my iPhone 3G. I put her AT&amp;T SIM inside and she was instantly able to send &amp; receive calls and texts. Since she doesn't want to pay for data (yet), she used the new iOS 4 network setting to turn off cellular data. I have heard that AT&amp;T scans their network and automatically adds data plans to 'smartphones', but so far this hasn't been the case.

If she does want to use data, have her call up AT&amp;T and let them know about the phone switch on the plan and they can sign her up for the iPhone data plan - it's $15/month for 200MB and $25/month for 2GB. You may be able to do this yourself online - I haven't tried - but contacting AT&amp;T is quick and relatively painless and is guaranteed to work.

One other thing - if her SIM is ancient (pre-3G), then you may need to get a new one that supports 3G from an AT&amp;T retailer or call AT&amp;T and they can ship you a new one. They may charge a nominal fee (~$10) for this service.