Moving to UK for a year from US - What are my options?

Okay, so my wife and I are moving to Edinburgh in two weeks, for a 1yr stay. I currently have an iPhone 4 and she has the iPhone 3Gs. I just got off the phone with AT&T and my options are to put our account on a 'reduced rate suspension' which means we get charged $10/month (per line... so $20/month) to essentially put our contracts on hold. The issue here is that an account can only be on a 'reduced rate suspension' for 180 days. After which, our normal plan would be automatically turned on - the woman said if we went with the cheapest options, it would come to $109/month! (so... $660 for our final 6 months of being in the UK)
I then called back and spoke to someone about canceling our account. Turns out with what we have left in our contracts the termination fees amount to $140 for my wife and $146 for my phone. Activation fees when we return (should we choose AT&T) would be $56, and that would cover both phones.
Even writing this makes it seem more absurd than what I already thought. Has anyone had a similar experience with moving abroad for longer than 6 months?
Second question...
Once we arrive in Scotland - any recommendations on best plans to get for our phones? Seems like O2 is the default provider and have relatively inexpensive plans. Will our US iPhones function properly by merely swapping out our AT&T SIM cards for O2 SIM cards? Do they need to be jailbroken first?
Any help/tips/etc... would be greatly appreciated as I'll be in need of getting my phone up and running as soon as I can when we arrive. Also, if anyone has any thoughts on the best way to use the phone to contact the US I'm all ears. I have google voice set up and it's only $0.10 per minute to call for me, and my google voice number is local for people here. I don't plan to do it often, but I'd love to know if there's a better (more free) option - skype? (embarrassed to say I've never used skype before)
Thanks in advance for any feedback.
-Matt

There are 5 networks selling Iphones in UK. You can buy a pay as you go Sim from O2 and T-mobile, others are on a 30 day contract. Web on pay as you go is $7.50 a month when you top up your pay as go phone monthly. Non contract phones are expensive but when bought from apple come factory unlocked and work in the USA on your return with any US Sim card and no future contract.
<Edited by Host>

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Moving to UK for a year from US - What are my options?

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