What to do with old IPhone?

Use it as a iPod Touch.

http://support.apple.com/kb/HT3406

Craigslist or one of many used phone sites. In any case, You won’t get much for it.

@johnpowell‘s tip is a good one. Also, now that you’re not relying on it as a phone, you can do some cool new things by jailbreaking it.

Decoy phone when you travel. Keep it in your pocket and f you get robbed, give the dirty rat the old iphone to satisfy his thirst for stolen goods and Apple technology.

I like @johnpowell‘s suggestion as even the 2nd-gen iPhone is good enough that you wouldn’t want to do what I did with my old Motorola c261; I use it solely as a bedside alarm clock.