I just got the car and bought a Motorola V-60 it states that it is activating phone and then next it says telephone not inserted. What do I need to do? The phone works outside of the car.

I'm not sure about 2004 Mercedes, but it might be the case that the car still has a set up for an analog phone, which will not work on a digital network. I've read somewhere that Mercedes was offering an upgrade for their cars with analog set up, which is a very expensive thing to do, by the way. As I said, I'm not sure if a 2004 car falls into this category.
Call Mercedes customer support and they'll tell you what to do.