What do I do about this Iphone?

My step dad bought me an Iphone off of craiglist today and it was in basically new condition and came with a life proof case that had some wear on it so it's been obviously used. Well we figured she'd been useing it and just upgraded but when I went to sync it with my Itunes accound it said that it was lost and erased while also having a phone number on it, it also said I had to log in with the account that had erased it in order to use it. What do I do? I already payed around 300 for the whole set and i'd really like to be able to use it because there's no way anyone would repay all that for the phone back and also I bought it from a lady in Alabama (I live in northern Florida) but the area code to the number attached was from Georgia. What can I do? Can I still use it?

Added (1). It's an iphone 4.

Added (2). By the way, no, I did not steal it. So if we have no choice but to go to the cops then at least we do have the proof in facebook messages. And if we do give it back, can the police get our money back since there's proof that we actually bought it from them?

It's a stolen phone you made up the story. Otherwise you would have just told the problem without all that fuss.