You wanted a demonstration? You got a demonstration; we've put together a video to show how the iPhone 4 antenna issue is not simply a result of Apple's miscalculation of how many bars are being displayed. Our own Erica Sadun wrote an iPhone app (at the suggestion of Engadget's Nilay Patel) to display the raw signal strength, the number of bars, and what Apple calls the graded signal strength. Erica's tests (see video above) show that the "Kung Fu grip of doom" results in the signal strength dropping to almost zero. According to Erica, removing her hand from the antenna gap brings the signal strength back to normal.
The Apple iPhone Bumper provides a cushion, but Erica's tests show that the death grip (otherwise known as holding the iPhone 4 normally in your hand, as shown in Apple's promotional video) can kill signal integrity even with the bumper installed, depending on the signal strength in your area. Marginal signal areas are affected most by antenna signal attenuation. Users in areas with strong reception will not see the same results.
It looks like Apple needs to 'fess up on this issue, and soon. NBC's Today Show brought up the antenna problem this morning, continuing to publicize the issue to a nationwide audience. They also cited the wave of YouTube videos from irate owners showing the grip issue. You can view the Today Show clip by clicking the Read More link at the bottom of this post.
UPDATE: Several commenters have brought up the excellent iPhone 4 post over at Anandtech regarding the antenna. Here's a quote from that post.
"The drop in signal from holding the phone with your left hand arguably remains a problem. Changing the bars visualization may indeed help mask it, and to be fair the phone works fine all the way down to -113 dBm, but it will persist - software updates can change physics as much as they can change hardware design. At the end of the day, Apple should add an insulative coating to the stainless steel band, or subsidize bumper cases. It's that simple."