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My question is, will going from the 1G to 3G be a big step up in performance, noticeably so that from the 3G to 3GS would be un-necessary? Or should I spend the extra and get the 3GS, which I've read is 'better' than the 3G?
I am still using the original iPhone as well. My wife bought 3GS about a month ago and I have used 3G on many occasions.

Although 3G is faster than the original when transferring 3G data, it isn't faster at other things. Although I find the original and 3G sufficiently fast, it does get bogged down due to slower processor and limited RAM (128 MB).

Given the price difference between 3G and 3GS, I would get 3GS no questions asked. It's not only the speed, which is indeed much faster (almost everything feels instantaneous), but larger storage (16 GB vs 8 GB), better camera and video recording, compass on GPS (very cool and surprisingly useful when using compass-aware apps like Maps and Yelp), voice control, and other little things.

That said, I am personally holding off upgrading to 3GS as I want more dramatic iPhone upgrade next year (not to mention not wanting to have the same phone my wife has).
 
The difference is huge!

Ok, i just had to chime in on this one. I just literally purchased a 3GS and did the restore from my 1G.

I just tested the Internet speed on my wifi and I am VERY HAPPY!

The old 1G iPhone was giving me an average of 535Kbps and the new 3GS just gave me 4769Kbps!!

Web pages come in SO FAST! I had no idea what I was missing on the iPhone.

I have a 20MB FiOS wireless Internet at home, but I was just used to the iPhone being DSL speeds at home, and now I'm really happy! I haven't had much time to check out the rest of the new device but apps load a lot faster too.

This looks to be a GREAT upgrade!
 
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