Having a serious think about the iPhone as well, but cost giving me pause as well. No issue with O2 as such as existing customer, but quite a lot extra one existing contract for, in effect, internet on the move. Had extended play with iPhone in shop and internet performance better with wifi than through O2 network. Rather seems to confirm Bushfiva's killing point about 3G.
Personally inclined towards keeping existing phone and getting iTouch for time being with its wifi internet connection (am lucky that for various reasons have a lot of access to free wifi services). Will cost less than extra over of 18 month iPhone contract. By then suspect existing phone will be well past it and iPhone will be 3G. Well, I can but hope I guess.