That keeps the activation in place so you could use it as an iPod only and not starting from scratch w/ the provider.
You should be able to insert any active ATT SIM to activate and then remove for use as you desire.
We've upgraded our iPhones to newer versions and we have an older iPhone-3. I've done the erase and reset back to day one out of the box. I was going to use it as an iPod. But upon restart after reset the only option is to insert a SIM card to activate the phone. If I slide the unlock, Emergency phone call is all that is offered. If I Plug it in with iTunes all I get is "We're sorry but we're unable to continue with your activation at this time. Please try again later or contact customer care".
Is this phone now a paperweight or is there some way to use it as an iPod?