Unless you have a 3G or 3GS, you cannot just stick an AT&T SIM into an iPhone and have it work out of the box. Your MIL needs to consider jailbreaking the phone with a tool like Pwnage. When you jailbreak, you "hacktivate" a 1st generation iPhone and it will work with AT&T SIMs. Activation/hacktivation means moving past that "Connect to iTunes" logo. A hacktivated 1st generation iPhone works with all standard American AT&T SIMs.
Unfortunately, jailbreaking is like dyeing your hair. It's relatively easy to do but once you go there, it's all about maintenance, maintenance, maintenance. You give up the normal iTunes upgrade path, where "Check for Upgrade"/"Upgrade Now" provides a really easy way to keep your iPhone on top of the latest firmware. Instead, you need to monitor the latest jailbreak updates and only move forward when they're available.
If that sounds like a lot of work, well, it is. Auntie currently has one pwned first gen iPhone on the Locus/O2 network (i.e. rebranded AT&T). It's running 3.0 because she hasn't had the time or interest in upgrading to 3.1. Until that happens, that first gen iPhone is missing out on all the application reordering fun that was introduced with iTunes 9.0.
And speaking of that, unless your first generation iPhone was pwned at 3.0 or 3.0.1, you may be out of luck with the the 3.1 jailbreak. (cite from iphone-dev)
Now for the "good" news. AT&T is quite good at migrating people to the proper iPhone plan, which is the plan that your in-laws have been resisting to date. The first generation EDGE-only 2G iPhone data plan remains at $20/month, not $30/month like the 3G and 3GS data plans. So they might want to consider "going legit" with AT&T.
As a rule, if you don't mind a two year contract with data(!), stop by a store and ask them for a new SIM card (they generally have billions of extras on-hand). You can activate through iTunes while signing up for an account. If the two year contract is too much of a pain, give them a call directly and see what you can do with the existing plan on your MIL's SIM. They may be able to upgrade an existing iPhone SIM without contract into an iPhone-compatible plan (after all, you do own the iPhone outright) if you're willing to speak to enough customer service representatives. The AT&T rule of thumb is this: If the first, second, or third customer service rep can't help you, the fifth, tenth, or twentieth might.
Going no-data officially is, unfortunately, a no-go with AT&T at this time. AT&T will not help you activate directly without an official iPhone data plan. And no, this makes no sense at all for people who own their iPhone outright and are willing to do business with AT&T. You used to be able to drop the data plan after speaking to enough service reps but AT&T has cracked down on this loophole.
Auntie wishes she had better news for you. After all first gen iPhones remain terrific toys and perfectly acceptable phones but Apple and AT&T are quite insistent that if you want to play with their toys, you have to do it in a way that they approve of.
Best of luck!