Coming in late to this thread so...
For those who don't think a potentially expensive iPhone can compete with the free phones you can get with service contracts... I never in a billion years could have imagined that ANYONE would pay $400 or more for a glorified Walkman. Not a chance, so I thought. Just because you wouldn't pay for it doesn't mean that there isn't a whole different market segment. If that weren't the case, there wouldn't be Treo's and Razrs and P900s and all those other $500+ phones. Somebody must be buying them....
For those who say Motorola phones suck horribly, my understanding is that that is 100% true... except for their new Razr, which is supposed to be awesome. I guess they're turning a corner....
For those who think phones aren't a good market to get into, I couldn't disagree more. I LOVE my 12" PowerBook in most ways, but I HATE how enormous it is. The computer as it is currently conceived is absolutely obsolete. What people want (at least my demographic wants it!) is a fully functioning super-computer the size of a small flip-phone or wristwatch. (With a 30" monitor, of course.) Cellphones are the computers of the future. They're just wating for better input methods (than micro-keyboards or pressing numbers repeatedly) and direct-to-eye-output... ie, a display onto glasses or projecting directly into the eye.