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It's working fine for me. Are you on the Verizon network? I don't think it works if you are on another carrier's tower like US Cellular. Alltel towers may or may not be fully integrated to the network depending on where you are so they might not work either.
If you can make calls at all it is activated so it doesn't make sense that it is saying to call the 800 number to activate.
Might need to take it to a VZW store or call support.
What does *228 do and why have I never heard of this before?
Option 1 is used to activate a new phone which they do in the store for you.
Just because your phone can see a cell tower doesn't mean it can use it. Option 2 updates the tower list (called the Preferred Roaming List) in your phone so it knows what towers it can use depending on Verizon's sharing agreements with other carriers. It also adds any new towers Verizon has put up since the list was updated.
Are you saying that you should use this when you are away from your normal calling area? i.e.- a different part of the country -- or Puerto Rico for example? Thanks