Cracked inner screen, outer screen fine

You can buy a 3g iphone for $199/$299 assuming your are eligible for upgrade ( you can check with AT&T to be sure).

You cannot swap for a different model. You may be able to get out of warranty service:

"Out-of-Warranty Service
If you own an iPhone and it requires service for any other hardware failure, Apple will service your iPhone for the Out-of-Warranty Repair Service fee listed below. Your replacement iPhone may be new or refurbished.
iPhone 3G Out-of-Warranty Service
8GB $199
16GB $299
Original iPhone Out-of-Warranty Service
4GB & 8GB $199
16GB $249
*All fees in US dollars and exclude applicable taxes

An iPhone is eligible for Out-of-Warranty Service if it is no longer eligible for warranty service and is determined by Apple to be repairable. If Apple determines that an iPhone is not repairable, for example, if it has failed due to liquid damage or catastrophic damage where the iPhone has been disassembled into multiple pieces then Out-of-Warranty Service is not available and the iPhone will be returned.

Apple may determine that your iPhone is not eligible for Out-of-Warranty Service. Please see Apple's Repair Terms And Conditions for further details."

http://www.apple.com/support/iphone/service/faq/

(courtesy of roamingnome)

No one knows for sure, but you probably are not even eligible for an upgrade until sometime in December of this year, so you would not be able to buy a new iPhone at a subsidized rate. And it is doubtful there will be upgrades for current 3G owners.

"i bought the iphone 3g on launch day and assume they would give upgrades to iphone owners."

I highly doubt that this will be the case. They have never had an upgrade, nor has another phone that I know of.

You bought a subsidized iphone from AT&T less than a year ago. You will not be eligible for upgrade for at least another year.

Apple does not repair your iphone under the "Out of Warranty" program, they would replace.

For Non-Apple (Aftermarket) iPhone Repair, you can try:

i) Dr.Cellphone or,
ii) Mission:Repair or,
iii) iResQ

Generally, a Google search will yield many aftermarket repair services. They are not too hard to find. Search, Evaluate &/or Contact, then choose one that makes you comfortable.

Best of Luck

Your assumption is correct, the first iPhone you bought was not subsidized and Apple shared in the revenue stream of monthly charges with AT&T. Prior to the release of the iPhone 3G, AT&T and Apple revised their contract and went to the more traditional US approach of a subsidized phone and AT&T collected from the revenue stream.

Yes, Apple would release a phone knowing all current owners aren't eligible as some people will choose to pay the unsubsidized price and they are always looking for new customers. And in December all the first day iPhone 3G buyers would be eligible for the upgrade.

This is not an iphone or AT&T issue. It is a subsidized phone issue. This is the way the subsidized phone industry works. This is true of Palm phones, Blackberry phones, Razor, and any other subsidized phone with any other provider.

If you buy any subsidized phone with any carrier, the same would apply.