I really can't see the iPhone costing £395 on PAYG. O2 will want to sell these phones, not have them sitting around for years til the price drops.
As someone else posted, £380 if the price for a SIM FREE Nokia N95 8GB. Handsets on Sim Free are always far more expensive. (I have a Nokia 6300 which costs £70 on PAYG whereas the Sim Free price is £140-£145).
I think the 8GB iPhone on PAYG will be somewhere near the price of the 16GB iPod Touch. They may not even release the 16GB iPhone on PAYG.
If the 8GB iPhone cost the same as the 16GB iPod Touch then that would be £269 and 16GB (32GB iPod Touch) £329 which is the same as the iPhone was on sale for perviously on contract. Which seems to be in line with other PAYG phones such as £240 for the K850