Cannot Activate iPhone in iTunes
I recommend going into full recovery mode.  Instructions are here: iPhone and iPod touch: Unable to update or restore.  A summary:


Disconnect the USB cable from the iPhone or iPod touch, but leave the other end of the cable connected to your computer's USB port.
Turn off the device: Press and hold the Sleep/Wake button for a few seconds until the red slider appears, then slide the slider. Wait for the the iPhone or iPod touch to turn off.


If you cannot turn off the device using the slider, press and hold the Sleep/Wake and Home buttons at the same time. When the device turns off, release the Sleep/Wake and Home buttons.

While pressing and holding the Home button, reconnect the USB cable to iPhone. When you reconnect the USB cable to iPhone, the device should power on.
Note: If you see the screen pictured below, let the device charge for at least ten minutes to ensure the battery has some charge and then start with step 2 again.


Continue holding the Home button until you see the "Connect to iTunes" screen. When this screen appears you can release the Home button:


If necessary, open iTunes. You should see the following "recovery mode" alert:


Use iTunes to restore the device.