Yes, they will replace it even if it is hacked. You don't need to say anything.

And Apple will do it anyway, because their return service is just short of fantastic (from my experiences).
You don't have to do this though. The iPhone is hard to break... If you hose it - recovery mode works regardless. And yes -
this will delete everything on your iPhone.
- Turn your iPhone on
- While it is on, hold the lock (button on the top) and home (button on the lower front) buttons down.
- Continue holding both buttons until the screen goes black (just a few seconds after the apple logo appears)
- Let go of the top button. Continue holding the Home button for several seconds.
- Plug your iPhone into your computer.
- iTunes will detect your phone in 'Restore mode'
- Recover your phone using the latest firmware. If you want to use older firmware (1.1.4 works just fine with Ziphone, BTW), hold the shift key as you click on firmware update button and you can browse for a firmware file (You will have to download an older firmware manually to load onto your iPhone using this method).
I hope that helps.
Also, hopefully you synced your phone recently with iTunes. If that is the case, once the firmware update has been applied and your phone is up and running again, iTunes will upload your stuff to it again (Address book, notes, calendar, bookmarks etc..).