Iphone 2g with dead lower keyboard strip out of warranty

Hi guys, I have an Iphone 2g that I paid $500 back in 08. I have not had any major problems with it until one day I went to text someone and the bottom row of letters on the keyboard did not work, but they do work if I turn the phone horizontal?? Also for whatever reason the o does not respond in the horizontal position. Every part of the screen works fine in other apps its just the **** keyboard? lock screen/calculator all work fine.
I took it to the Genius Bar today and explained what was going on and the guy said I would have to pay $200 for a refurb. I realize my phone is out of warranty but the more more research I have done in the last few days tells me this dead strip touch screen thing is a well known issue. Ive restored 10+ times and it still did not fix the problem. I dont think its the digitizer so I am at a loss literally. I believe for the price I paid for this phone Apple should honor making good on any known issues like this. Either fix it or give me a refurbished 2g and Ill be happy.
Macbook Mac OS X (10.6.6)