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It is a federal law passed last year by the FCC, that is the only reason I switched to AT&T, I already had a 3G smartphone. Also- when I decided to grab an iPhone 3G four months later, it was considered my first phone so it was normal new customer pricing cuz I never had a contract before.
Your best luck is to move to a postpaid, sell your iPhone and buy a 3G for $99 or the 3Gs for $199, make a little money in the process and get a new product if you so wish. AT&T needs to be held responsible for this kinda stuff though, they get away with it way too often. FEDERAL INVESTIGATION!!!