Several 3GS users have had this problem, mostly people with unlocked/jailbroken iPhones for use outside of the US. Basically, iOS 5 would install but you could not complete activation because it said there was no SIM card installed. It's a huge pain. The issue has something to do with baseband inconsistency, I think.
Anyway, a solution via jailbreaking and unlocking has been posted in the apple support forums:
https://discussions.apple.com/thread/3374731?start=165&tstart=0
The process is described here:
http://cydiahelp.com/jailbreak-ios-5-iphone-4-3gs-ipad-2-1-ipod-touch-how-to/
and here:
http://cydiahelp.com/ultrasn0w-1.2.4-released-unlock-iphone-4-3gs-on-ios-5
Anyway, a solution via jailbreaking and unlocking has been posted in the apple support forums:
https://discussions.apple.com/thread/3374731?start=165&tstart=0
The process is described here:
http://cydiahelp.com/jailbreak-ios-5-iphone-4-3gs-ipad-2-1-ipod-touch-how-to/
and here:
http://cydiahelp.com/ultrasn0w-1.2.4-released-unlock-iphone-4-3gs-on-ios-5