Correct, GSM Carriers only allow one activation of a SIM. So if you upgraded your wife's line using the new SIM that came with the iPhone 3G S, then the SIM in her phone is now deactivated and AT&T will not activate it again.
Your sister can just use her exiting SIM if she has one or she can pick one up from any AT&T Corp retail store to use to activate the new add-a-line. Since she is adding a line there should be "No Charge" for the new SIM to activate your wife's handoff phone.
Note: Some Authorized agents will charge up to $25 for a new SIM, don't pay for it.
Dave