I'm back with a new replaced iPhone. They used a flash light to look through the headphone jack and the bottom of the iPhone. They were looking to see if the water damage sensor was red. Obviously it wasn't so I got a new iPhone.
Then came the part where he wanted to activate my phone so I could use it. He asked if this was a new sim card because it wasn't registering it. I said I never activated it, that I was only using it as an iPod and for Wi-Fi. He gave me a funny look, asked his supervisor if that was ok. Supervisor said it wasn't ok, so I took out a printed page from Apple that said phone didn't need to be activated to get warranty. So that shut them up and he said, I just wanted to activate it for you. I told him, don't worry I'll activate it myself, thanked him and walked away
On a side note. I couldn't my original phone to a virgin state. It was activated, jailbroken and unlocked. They didn't notice that though because I had the AT&T sim in it and no installer or cydia icons.
The page where it says iPhone doesn't need to be activated to get warranty is here, you have to put your serial number and if it's found to be not activated it will display that message:
https://selfsolve.apple.com/GetWarranty.do
I guess it depends what apple store you go into and what genius boy you get. You might get a lonely geeky guy with no authority in his life that will play an authority trip on you at the store.
That's my story.
Thanks to all that replied!