Trying to activate my 3GS and the phone will not recognise the sim and will not activate

Help Please
I have changed my call plan with my service provider from contract to PAYG and have just tried to upgrade my 3Gs to IOS 5.0.1. I have purchase a iPhone 4 and was using the 3Gs as  back up.
I set the phone to factory restore as it was being sluggish and I felt a restore would be the best option. The restore went ahead but the phone will not accept that I have a valid sim in the phone and will not activate stating that the servers cannot activate the phone. 
The sim is the new PAYG sim given to me by O2 and I had even arranged for the number to be transferred to the PAYG sim. I am at  a loss to understand what has happened as the sim will work fine in an old 8gb Iphone 2g and other mobiles. I have not kept the old contract sim so I am unable to insert that to see if that was the problem.
How can I get my 3Gs acitated and working? Do I need to contact O2 or take the phone to an Apple store. Any advice would be appreciated.

You need a valid micro-sim. to acivate.
IOS: Resolving iPhone activation messages
http://support.apple.com/kb/TS4242

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