What happens to old AT&T sim card and phone after activating iPhone?

You throw away the SIM card and keep the phone as a backup. The iPhone SIM will work in it unless it was registered on the original AT&T wireless network. You can also get it unlocked and use it when traveling out of the country with local prepaid cards. Sometimes AT&T will give you the unlock code if you are a good customer, and, if not, there are services on the web that will unlock it.

The old SIM car deactivates. Your phone is still good, so keep it should you ever need to use it. As you can take the SIM out of your iPhone and use it in a normal phone. You just wont have all the features. I believe you loose Visual Voicemail, and one other.

SIM cards are considered disposable. They have no intrinsic value; the cost of restocking them would far outweigh the cost of the card. And remember that the holder they come in is gone, so they can't be resold.

You can also ask AT&T to unlock your old phone. I did this with my Blackberry. I am taking a trip to Italy next month so having an unlocked phone lying around will be good.