Like, how bad is the damage? You mentioned the screen being busted, but is that the full extent?? If so, you may be able to simply get a replacement screen. I think I remember Wraggster posting an item about a retailer offering those a few days ago.
As far as the other options you mentioned, it does sound like Sony will send you an upgraded PSP if you send yours to them for servicing (and it's still covered), so about the only thing that would be good for is selling/trading in the newly refurbished model in order to finance your acquisition of a 2.00 or lower model.
Most retail stores won't mind letting you look at the box, so don't hesitate to ask if you do end up having to buy a new PSP. They might give you some strange looks, but most places follow "the customer is always right (no matter how strange the request)" policy. I asked half a dozen stores when I was searching for mine, and they all cheerfully helped me out, even though NONE of them understood the importance of looking at a few particular digits on the box. Don't forget about mail-order/import stores as well.
No matter what happens with your now broken PSP, please don't throw it away! I've read about too many people doing that, and it makes me cringe everytime!! I would love to have a PSP to tinker around with, so I'd gladly pay for the shipping to send it out to me, as well as throw in a few bucks to make it worth your while (although, I'm sorry but I couldn't begin to pay you what it's worth retail). There are quite a few people who would have legitimate interest in broken PSPs, so you may even want to start up an eBay auction... Although that's probably a real bad area to get into it... I can just imagine people starting to cell PSP shells and claiming that they're actually broken PSP's. (!_!)
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