Is anyone else as amazed as I am that people take the time to post a reply, but they don't take the time to read the original post.
This guy is NOT trying to get warranty repair. He just wants to have it fixed
AND HE IS WILLING TO PAY FOR IT.
Its just absurd the number of people who say things like "I side with apple on this", or point our that the warranty doesn't cover water damage. My personal favorite is the guy who took time to make the analogy about a car rolling into the water. The quality of these boards has really gone down as Apple has become more and more successful. I remember a time when almost everyone actually tried to be helpful.
Which brings me back to the Original Poster...
I would take the phone back into an Apple store and try again. If you get refused, ask to see a manger - preferably one who has their own children.
The other thing is that you might want to ask someone at the Apple store to help you activate the phone because it is possible that the problem isn't with the phone. As crazy at it seems, I know from personal experience that an iPhone can survive a swim in the toilet. I also know from personal experience that some of the USB cables shipped with the iPhone are bad (well, at least one of them was - mine!).
And like a previous poster said, it might even be a software problem (your iTunes might not be up to date, or its corrupted ).
At the end of the day, if the phone does need repair, what you are asking is not outrageous. If you keep elevating the issue to higher level managers, you are bound to eventually find someone at Apple with enough intelligence to understand your problem, and understand that you are not trying to pull one over on them.
Your not the only person who has been given a phone as gift. Your not the only person who has damaged your phone before activation, and your not the only person who has waited for a contract to expire to activate your phone.