IPhone -no wifi - out of warranty costs UK

I have a 3G phone which is a replacement issued in May for a previous fault. Since the 3.0 upgrade I have had intermittent problems with no wi-fi and despite restoring, various resets and so on, the problem is now permanent. I called Apple and, in short, they told me it was out of warranty (3 months since 11 May) and I could pay for a repair at £140. Even if this repair took 5 minutes in a retail store, it would still be £140.
This appears to be a known fault, and it started well within the 3 months (that I did not know applied). I do not think the repair charges are at all reasonable, and my only option appears to be to put up with this for the remainder of the contract and then get a new device, not an iPhone. I will be unable to sell this one as it is broken. I would sooner smash the phone with a hammer than pay £140 for the repair, but I need Wifi too, especially when travelling. The network, 02, are useless and no help.
So I guess I will be getting a pay as you go something else and sitting out the contract with O2, then that is the end for me an the iPhone!
Pity because my house is full of Apple stuff (G5 powermac, 2 x iMac, Macbook, old iPhone, Aple TV, 2 x old iPod and a iPod Touch)
Any suggestions to help resolve this, or choice of a new phone?

I have had my iPhone replaced three times in total by Apple (despite having insurance with O2). On two occasions, the phone was replaced due to Wi-Fi problems. I demonstrated in store that the Wi-Fi was not stable, and they replaced it no questions asked.
Just be persistant, refer them to the forums, and good luck!

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