Activation problems

So my friend gave me his iphone since he got the new 3g s, and I decided to reset the thing to factory default. Now the phone just tells me to insert valid sim with no pin lock to activate. My friend lives about 1000 miles away from us and I just basically wanna use the phone for the ipod aspects of it. I do have at&t as a carrier but I don't want to aquire any more fees for owning an ipod or whatever. Is there anyway for me to use the phone and unlock it? Also if I do get it to work can I just use the iphone as my new phone and just plug ym sim card into it or are there additional fees?

 

So if I jailbreak it can I still use it as a phone? I thought I couldn't jailbreak it if my itunes won't connect to it. Is there a way to use it as a phone with my current plan without any additional fees?