I just took my iPhone 3G to the Apple store in Providence, RI... it had a foreign obstruction under the glass (some piece of dirt, took up a 3x3 pixel area) and actually had a pixel dead. The guy looked at it, looked at my AppleCare plan I purchased.
He did a standard moisture check on all the open areas (sync port, headphone jack), then took it in back to disassemble to see if they could fix it. He came back, and issued me a replacement. 1 dead pixel, replaced.
He DID mention that the flashing, where the silver case surrounding the screen meets the white plastic back of the phone, was starting to separate, and that could void the warranty. From his explanation, that is where the foreign material comes in, and happens if you subject the phone to extreme amounts of pressure, as in carrying it in a front or rear pants pocket (hmmm... where else are you supposed to carry when its not winter, when a coat is not available?)
Regardless, Apple replaced it, for a foreign obstruction and 1 dead pixel.