We derive a quantum theory of the role of acoustic and optical phonons in modifying the optical absorption line shape, polarization dynamics, and population dynamics of a two-level atom (quantum dot) in the "colored" electromagnetic vacuum of a photonic band-gap (PBG) material. This is based on a microscopic Hamiltonian describing both radiative and vibrational processes quantum mechanically. We elucidate the extent to which phonon-assisted decay limits the lifetime of a single photon-atom

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... state and derive the modified spontaneous emission dynamics due to coupling to various phonon baths. We demonstrate that coherent interaction with undamped phonons can lead to an enhanced lifetime of a photon-atom bound state in a PBG. This results in reduction of the steady-state atomic polarization but an increase in the fractionalized upper state population in the photon-atom bound state. We demonstrate, on the other hand, that the lifetime of the photon-atom bound state in a PBG is limited by the lifetime of phonons due to lattice anharmonicities (breakup of phonons into lower energy phonons) and purely nonradiative decay. We also derive the modified polarization decay and dephasing rates in the presence of such damping. This leads to a microscopic, quantum theory of the optical absorption line shapes. Our model and formalism provide a starting point for describing dephasing and relaxation in the presence of external coherent fields and multiple quantum dot interactions in electromagnetic reservoirs with radiative memory effects.