This is pretty pathetic. You are still within your time period of which you can return everything and cancel your contract with no cost. I know you probably don't want to do that, but if you don't get satisfaction from Apple, you might consider this option.
Just take everything with you to the ATT store you bought it from and, get the manager and tell him/her either you get a brand new phone right then or you want your money back for them, and you will cancel the 2 year contract. They will most likely get you a new phone. If they don't, you can cancel it and go to Apple and buy new ones from them. Now, I think there is some time period after you do this before you can then sign a new contract, but I don't know what it is. You should find this out first.
Money is the only thing these companies understand or care about. Threating to cancel the 2 year contract is something they can see in dollars and cents, although in future dollars and cents which might not be enough, versus their immediate cost. It can't hurt to try and you don't have to cancel if you don't want to, even if you threaten to.
Good luck, and hopefully Apple will fix your problem for you (give you a new phone) and this won't be necessary. I think people who want to buy an IPhone 3G are better off buying it at an Apple store if at all possible, rather than ATT.
The Omega