I would love to see iPhones on Pay & Go, but I don't see it happening. By making iPhone's available without a contract, would that not just stop people buying the iPod touch? I know I only bought an iPod touch because I could not afford the contract when it came out last year. This year, however, my wallet is looking alot fatter, and I can't wait to spend some money. I just hope it is available shortly after it is announced.
Yes the upgrade route sounds interesting, my only concern is though if the would require the original iPhone back. I lost mine the other day after it fell off the belt clip I had, so wouldn't be able to return the product if they did. I'm holding off getting a new phone until we get official news on the new iPhone, SIM replacement has arrived quite quickly but have no phone to use it in, due to the non-existant stock of 1st gen iPhones.
If they don't then hopefully it will be out before 30th June as I have a nice £100 credit voucher for Carphone Warehouse due to the price drop on the 8GB model, just 2 weeks after I bought mine. So can use that towards the new phone