What happens to my iPhone when my contract runs out & I get Gen 2 iPhone?

Right, my iPhone was activated last November when it was launched over here in the UK. I'm assuming once activated, I can change the sim card in the iPhone and it should work alright? I haven't tried switching sim cards before but don't see the point of paying for the monthly contract and also paying for a pay & go sim.
So when my O2 contract ends in May 2009, am I right in thinking that i'll be able to give my iPhone to my wee sister and she can put her Pay & Go O2 sim in it and work away, whilst I take out a new contract for the 2nd Gen iPhone (assuming that there will be one).
If this is the case, everyone will be looking on ebay next year to find genuine 2nd hand unlocked iPhones that will work with their sim cards without a contract. True or false?

It just sounds like this at the minute...
If anyone wanted to have/use my iPhone when my contract ends - they would simply have to enter another contract!
By the time my contract ends, my iPhone will be in pretty used condition with scratches, blemishes and who do you think will want to pay contract prices to use a secondhand grubby iPhone?
Will we be stuck with iPhones that will be useless in a years time? unless someones willing to pay for a contract to use the old 2nd hand iPhone (it's a bit like some offering you to buy their old Nokia 3310 (Remember them!?) and asking you to pay at least £35 a month to use it!) by the time this happens no one will want the Gen 1 iPhone because it will be outdated by other devices.
Maybe i'm wrong, but i suppose we'll just have to see if O2 offer a deal to current iPhone contract holders when a new decive is launched or our contracts end.

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