From Boing Boing Gadgets
(2) Requires new two-year AT&T wireless service contract, sold separately to qualified customers; credit check required; must be 18 or older. For non-qualified customers, including existing AT&T customers who want to upgrade from another phone or replace an iPhone 3G, the price with a new two-year agreement is $499 (8GB), $599 (16GB), or $699 (32GB).
myBlog 
Seriously, this is all a tempest in a teacup: The upgrade behavior for the iPhone 3G S is no different than that for any other subsidized cost for a phone, through any carrier:
http://gizmodo.com/5284318/whiners-of-the-world-shut-up-about-the-iphone-3gs-upgrade-price
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