iPhone not restoring error 1013 Out of warranty so Apple wont replace 3G

I started my contract in July 08 and am currently on my 3rd iPhone as the first two had cracks on the casing. My last replacement was May 09 therefore making my current phone 6 months old.
Since Friday I have been having problems with my phone crashing and saying I need to reconnect to iTunes to restore but when I connect to iTunes, it doesnt recognise the iPhone (it also says the IMEI and ICCID numbers are unknown). Ive put it in DFU mode but then get a pop up saying itunes cannot activate your iphone because the sim card is not inserted or a sim pin is required. I eventually managed to get it to start a restore only for it to say iphone could not be restored error code 1013. I then tried to use a different usb cable but still no joy. So I then tried my MBP as I was having no luck on my iMac. I eventually managed to restore it and get it working again until i turned the phone off the next day and back to the same problem. This time it fixed itself several hours later without plugging into iTunes but all the 3rd party apps wouldnt work. When I clicked on them it would just send me back to the home screen. I then turned the phone off again this morning to make it show the fault as Id decided to go to an Apple Store to see if they could fix it. When I got there they just did exactly the same things as Id already done and said it would be £140 for a replacement as I was outside of my 12 month warranty. I disputed this as this particular handset is only 6 months old but they said its classed as a repair not a replacement under the original 18mth contract so they couldnt swap it. So Im now stuck with a faulty iPhone mid contract with the option to pay for a replacement or to upgrade early with o2. Both ways costing me more money!!!! I have been told that I may have a case under the Sale of Goods Act 1979 as that states the product must be fit for purpose which this iPhone clearly is not!!
I have now got the iPhone working again (thanks to the MBP again) and have had to start from scratch and not restore from backup. I am fearful that if I turn my phone off again or it crashes that this will all start all over again!!
Can anyone shed light on this error or the warranty situation please as I cant afford to pay for a replacement?
Thanks
iPhone 3G 16GB White iPhone OS 3.1.2 16GB White iPhone 3G, 160GB iPod Classic, 32GB iPod Touch, iMac 24"