I think some people have o2's comments about wholesale prices being the same as those Apple have given to its US provider wrapped around their heads. They're referring to the wholesale costs of the 3G S being the same on either side of the pond, not the 3G S prices being the same as they paid for the iPhone 3G.
If you compare the o2 and ATT 24 month contracts (seeing as ATT do not offer 18 month deals) o2 are actually CHEAPER on all 3G S models. This even goes for the price drop on the 3G 8GB which is $99 (£61) in the US but FREE in the UK. People should also remember that o2 dropped the price of the 3G just over a month ago, a move not instigated by Apple or copied by other providers at the time, so the iPhone 3G is effectively ALOT cheaper than it was a year ago. Just as Apple stated in their key note.
Only the 18 month deals in the UK work out more expensive, simply because your spreading the cost of your handset over a shorter period of time.
Also, anyone moaning about upgrades really needs to remember, what they really own, is just a mobile phone, on a mobile phone contract, where normal mobile phone terms and conditions apply. The only special treatment you deserve is from a phsyc ward if you think you're better than any other mobile user.
The pricing is expensive, but in direct comparison, no different to the US.
I'm edging towards a 24 month contract, taking a 32GB model. I know I'll miss out on iPhone 2010 but, assuming the product cycle remains consistent I'll be on track for a brand new handset come iPhone 2011. Also, I'll get iPhone OS 4.0 for free no doubt within those 24 months, which really - reinvents your phone anyway so why do you need an urgent upgrade?