Refurbished 8G iPhone 3Gs are now available for $49 at AT&T. The 16 GB refurbished models can be purchases for $99. AT&T is most likely trying to get rid of older models to make more room for the 3GS.
Refurbished iPhones are generally in very good condition. They are lightly used and returned within 30 days of their original purchase. The phones are tested by AT&T for quality before shipping.