The best way to dispose of an old phone is to recycle the phone. By recycling your phone you will help keep toxic metals out of the environment. One easy way to recycle your phone is to just take it to an AT&T store or Verizon store, and they should have recycle phone bin, that you can drop your old phone into.
You can also donate your phone to Cell Phones for Soldiers:
http://cellphonesforsoldiers.com